Sold out, or merely held back? - Indian Real Estate Forum

amolk09 · 29-03-10

Friends ,

Read this article from Indian Express .. its very interesting know how Builder mafia manipulate with buyer's sentiments ....

In pune also same thing happening ... all of us must have experienced this !!

-------------------------------------------------------------

In India, developers live in a world all of their own where sales indicators and market pattern often defy conventional wisdom, even in a sluggish market. While the astonishing sales graphs of some of the recent launches indicate a miracle recovery in the realty sector, a closer inspection reveals that there is more than what meets the eye.

Consider this: Last week the country’s leading developer, DLF, claimed to have sold more than 80 per cent of the upscale flats at its central Delhi project – Capital Green Each – at Rs 4 crore per apartment within two days of its launch. Last year, when the developer had launched the first and second phases of the project, it claimed to have completely sold off both blocks, with 1,350 and 1,250 apartments respectively, within a day of its launch.

This has become a trend among developers who have started claiming that their projects are completely sold out within a few days, if not hours, of their launch. For a sector that only a few months ago struggled to make any sales, such assertions are difficult to swallow. The question is: How genuine are these claims?

THE UNDERWRITING NEXUS

An investigation by The Indian Express has found that the reason behind the success of some projects is that developers use the services of brokers who underwrite these projects. Developers give a freehand to a few brokers who underwrite these flats with the intention of offloading them at a premium later. With the help of this nexus, developers start making claims that their projects are sold out.

A prominent underwriter, on whom two of the country’s top developers rely on, told The Indian Express that there is a return of positive sentiment in the sector. “Buyers are coming back in the market. We are sure of selling the properties that we have underwritten,” he says. He adds that with interest among home buyers growing, prices were sure to begin rising once again, spelling profits for underwriters.

According to PSN Rao, founder chairman of the National Associations of Realtors (NAR- India), the phenomenon of underwriting has been in existence for a long time. “The advantage to the developer is that his products get sold quickly while the broker earns not just a commission, but also enjoys the benefit of any price appreciation that may occur while he holds the property,” he says.

Industry experts say developers are creating an artificial situation in concert with brokers. This is also done as a marketing ploy of creating a situation that leads prospective home buyers to think that demand is high and that they should buy the property now or else it will become more expensive. Developers also use these strategies to create an artificial shortage of their apartments. Not only does this nudge buyers towards a purchase decision, it also allows developers to sell the next phase of their project at a higher price.

One of the disadvantages to the end-user in projects that are underwritten by financiers and brokers is that even though he might be early in the queue, he will not be able to get the location of his preference as it may be blocked due to bulk bookings by underwriters.

By inflating their sales figures with these underwriters, builders are intentionally sending false signals about the actual situation. “By this simulation, the developer is able to tap into the herd mentality of buyers and snare many of them — including people who would not have bought if they had known that the real sales numbers of the project were much lower,” says Sanjay Sharma, managing director of Qubrex, a real-estate brokerage company.

NAR-India’s Rao says that the need of the hour is to create norms so that underwriting does not lead to artificial scarcity. “Developers have a tendency to make tall claims. The only way to verify these claims is to mandate by law that buyers’ names, addresses and tele numbers be made available in the public domain. Interested parties can then check the veracity of developers’ claims with the actual buyers,” says Rao.

However, as some industry experts point out, the entire game of underwriting can boomerang if brokers and underwriters fail to offload their stock to end-users or long-term investors. Property prices could once again take a beating and the nascent recovery in the residential segment could be aborted.

BETTING ON UPSCALE PROJECTS

Just a few months ago -- when the slowdown was hammering the market and buyers kept away as lending dried up -- few developers veered towards the affordable segment, while some others in metros continued promoting their upscale projects. Analysts say that demand for upscale properties exist in metros like Delhi and Mumbai where residential prices are expected to firm up even more in the next few months due to a paucity of supply.

Demand in this segment also exists because developers offer a large margin of commission to brokers, somewhere around 10 to 15 per cent for properties above Rs 1 crore. Since the buyer conversion rate (BCR) is considerably high in this segment, developers have started counting on upscale home buyers as their best bet to bail them out of their cash crunch.

Says Mrunal Duggar, vice-president of homebay residential at Jones Lang LaSalle Meghraj, “The BCR is quite high in this segment largely because there is currently a rather limited choice of upscale projects.”

However, some feel this is not because of buyer conversion rate. Anand Narayanan, national director, Knight Frank India explains, “I would say it is because of per sq ft realisation rate. Per sq ft realisational value tends to be higher in upscale projects rather than those in the affordable segment. The downside will be sales velocity.”

NEED FOR A REGULATOR

Observing that developers are once again in a rush to launch new projects, the Reserve bank of India (RBI) has expressed concern about a bubble-like situation developing in the sector. It has ordered banks to set aside more funds to cover defaults on loans to property companies. It has also hiked the risk weightage on loans to the commercial real-estate segment. “All this has been done in order to avoid a price bubble, like what happened between 2005 and 2007 when prices shot up,” says a government official.

On the other hand, industry experts want the government to introduce standard disclosure norms. This would force developers to disclose details about their projects truthfully and would also make it easier for buyers to verify facts, including how many apartments have really been sold and to whom. Rao says, “The proposed Real Estate Regulation Bill should include this.”

While the real estate sector is yet to get its own regulatory body, one of its key responsibilities would be to eliminate speculation from the property market. Only then will end-users be able to purchase property at genuine, and not artificially inflated, prices. l

Article by : praveen singh for Indian Express
Posted: Saturday , Mar 27, 2010 at 0053 hrs

niraj2010 · 29-03-10

Two things -

1. Good to see Indian Express carrying out such investigation. There is some part of media at buyer's side. Else TOI keeps on shouting every saturday about how today will be the last day when you can buy flats.

2. Govt regulation in real estate. I dont think this is going to happen and why..who runs this real estate mafia?

amolk09 · 29-03-10

TOI is nothing but toilet paper ... their staruday property edition is really absurd

vizworld · 29-03-10

Reading this article does provide strength to the general feeling on this forum, that builder nexus is using wrong ways to increase rates. Bad thing is that the solution it provides is for a regulator to appear on the scene. I am not very sure if a goverment managed regulator would in any case try to help the cause of citizens. Is there nothing that we as citizens could do to help each other out in such a situation. Does acts like RTI even work in this field? Why not some NGO work in this field and force goverment to work on the subject for geneal welfare of the public.

compuwalah · 29-03-10

In this case the prices will fall sharply in case of downturn , but again depends as what ratio of the props are held by such underwriters.

helmak · 29-03-10

This article holds true for NCR and all cities in North.
For Pune its mostly end-users and this article does not hold true. Mumbai esp Navi Mumbai is very much the way article says.

compuwalah · 29-03-10

Quote:

Originally Posted by helmak

This article holds true for NCR and all cities in North.
For Pune its mostly end-users and this article does not hold true. Mumbai esp Navi Mumbai is very much the way article says.

Is that is true, then underwriters sooner or later turn their eye towards Pune. In that case the prices may be jacked up further, panicking some more set of buyers and drawing attention of some more NRIs/Overseas Investors (which agains adds fire to the fuel), which result in more price rise.

aditi sharma · 29-03-10

Do you think pune is void of any such practices ?
It happens here as well, it might be the volume and exposure of Delhi is more so it gets highlighted in such reports.

Quote:

Originally Posted by compuwalah

Is that is true, then underwriters sooner or later turn their eye towards Pune. In that case the prices may be jacked up further, panicking some more set of buyers and drawing attention of some more NRIs/Overseas Investors (which agains adds fire to the fuel), which result in more price rise.

niraj2010 · 29-03-10

Quote:

Originally Posted by vizworld

Reading this article does provide strength to the general feeling on this forum, that builder nexus is using wrong ways to increase rates. Bad thing is that the solution it provides is for a regulator to appear on the scene. I am not very sure if a goverment managed regulator would in any case try to help the cause of citizens. Is there nothing that we as citizens could do to help each other out in such a situation. Does acts like RTI even work in this field? Why not some NGO work in this field and force goverment to work on the subject for geneal welfare of the public.

The solution is not NGO or RTI or some movement..essentially because it is matter of profit..

One solution is to have mechanism where buyers interact, rate properties. The mechanism which can value a property rationally and all buyers stick to that valuation. Needless to say IT can help here, but our IT junta is busy in sharing a 2BHK with 6 guys somewhere in USA and spending that hard earned money on mafia.

frugality · 29-03-10

Quote:

Originally Posted by helmak

This article holds true for NCR and all cities in North.
For Pune its mostly end-users and this article does not hold true. Mumbai esp Navi Mumbai is very much the way article says.

so according to you Pune has least underwritten properties ... if so then most are end users ... thus making Pune cheapest amoung metros ...
(It even doesn't have a PDA...... Pune Development Authority.. seems only villages don't have that in rest of India

)
EVEN then the prices ARE HIGHER then NCR and any other metro ?

If other metro's are underwriting then their price is expected to be higher RIGHT comparing to the older prices ?
so NCR prices are higher .... then what you will say about PUNE ... it is costlier then even NCR ????

This mutual contradictory statement is difficult to under stand.....
One thing will clear this contradiction .....
Pune has Most Underwritten properties ... and those mostly are on RENTALS by the broker themselves ...!!

GO pick up Epaper of any cities of TOI on weekdays ... RE ads are just a blip ... and see of pune .... most ads... hundreds of exhibitions ....
these builders can NEVER become BIG company ... if they keep such mentality ....
but never mind ....

29-03-10	#1
amolk09 Member Join Date: Feb 2010 Posts: 109 My Mood: Thanks: 0 Thanked 0 Times in 0 Posts	Sold out, or merely held back? Friends , Read this article from Indian Express .. its very interesting know how Builder mafia manipulate with buyer's sentiments .... In pune also same thing happening ... all of us must have experienced this !! ------------------------------------------------------------- In India, developers live in a world all of their own where sales indicators and market pattern often defy conventional wisdom, even in a sluggish market. While the astonishing sales graphs of some of the recent launches indicate a miracle recovery in the realty sector, a closer inspection reveals that there is more than what meets the eye. Consider this: Last week the country’s leading developer, DLF, claimed to have sold more than 80 per cent of the upscale flats at its central Delhi project – Capital Green Each – at Rs 4 crore per apartment within two days of its launch. Last year, when the developer had launched the first and second phases of the project, it claimed to have completely sold off both blocks, with 1,350 and 1,250 apartments respectively, within a day of its launch. This has become a trend among developers who have started claiming that their projects are completely sold out within a few days, if not hours, of their launch. For a sector that only a few months ago struggled to make any sales, such assertions are difficult to swallow. The question is: How genuine are these claims? THE UNDERWRITING NEXUS An investigation by The Indian Express has found that the reason behind the success of some projects is that developers use the services of brokers who underwrite these projects. Developers give a freehand to a few brokers who underwrite these flats with the intention of offloading them at a premium later. With the help of this nexus, developers start making claims that their projects are sold out. A prominent underwriter, on whom two of the country’s top developers rely on, told The Indian Express that there is a return of positive sentiment in the sector. “Buyers are coming back in the market. We are sure of selling the properties that we have underwritten,” he says. He adds that with interest among home buyers growing, prices were sure to begin rising once again, spelling profits for underwriters. According to PSN Rao, founder chairman of the National Associations of Realtors (NAR- India), the phenomenon of underwriting has been in existence for a long time. “The advantage to the developer is that his products get sold quickly while the broker earns not just a commission, but also enjoys the benefit of any price appreciation that may occur while he holds the property,” he says. Industry experts say developers are creating an artificial situation in concert with brokers. This is also done as a marketing ploy of creating a situation that leads prospective home buyers to think that demand is high and that they should buy the property now or else it will become more expensive. Developers also use these strategies to create an artificial shortage of their apartments. Not only does this nudge buyers towards a purchase decision, it also allows developers to sell the next phase of their project at a higher price. One of the disadvantages to the end-user in projects that are underwritten by financiers and brokers is that even though he might be early in the queue, he will not be able to get the location of his preference as it may be blocked due to bulk bookings by underwriters. By inflating their sales figures with these underwriters, builders are intentionally sending false signals about the actual situation. “By this simulation, the developer is able to tap into the herd mentality of buyers and snare many of them — including people who would not have bought if they had known that the real sales numbers of the project were much lower,” says Sanjay Sharma, managing director of Qubrex, a real-estate brokerage company. NAR-India’s Rao says that the need of the hour is to create norms so that underwriting does not lead to artificial scarcity. “Developers have a tendency to make tall claims. The only way to verify these claims is to mandate by law that buyers’ names, addresses and tele numbers be made available in the public domain. Interested parties can then check the veracity of developers’ claims with the actual buyers,” says Rao. However, as some industry experts point out, the entire game of underwriting can boomerang if brokers and underwriters fail to offload their stock to end-users or long-term investors. Property prices could once again take a beating and the nascent recovery in the residential segment could be aborted. BETTING ON UPSCALE PROJECTS Just a few months ago -- when the slowdown was hammering the market and buyers kept away as lending dried up -- few developers veered towards the affordable segment, while some others in metros continued promoting their upscale projects. Analysts say that demand for upscale properties exist in metros like Delhi and Mumbai where residential prices are expected to firm up even more in the next few months due to a paucity of supply. Demand in this segment also exists because developers offer a large margin of commission to brokers, somewhere around 10 to 15 per cent for properties above Rs 1 crore. Since the buyer conversion rate (BCR) is considerably high in this segment, developers have started counting on upscale home buyers as their best bet to bail them out of their cash crunch. Says Mrunal Duggar, vice-president of homebay residential at Jones Lang LaSalle Meghraj, “The BCR is quite high in this segment largely because there is currently a rather limited choice of upscale projects.” However, some feel this is not because of buyer conversion rate. Anand Narayanan, national director, Knight Frank India explains, “I would say it is because of per sq ft realisation rate. Per sq ft realisational value tends to be higher in upscale projects rather than those in the affordable segment. The downside will be sales velocity.” NEED FOR A REGULATOR Observing that developers are once again in a rush to launch new projects, the Reserve bank of India (RBI) has expressed concern about a bubble-like situation developing in the sector. It has ordered banks to set aside more funds to cover defaults on loans to property companies. It has also hiked the risk weightage on loans to the commercial real-estate segment. “All this has been done in order to avoid a price bubble, like what happened between 2005 and 2007 when prices shot up,” says a government official. On the other hand, industry experts want the government to introduce standard disclosure norms. This would force developers to disclose details about their projects truthfully and would also make it easier for buyers to verify facts, including how many apartments have really been sold and to whom. Rao says, “The proposed Real Estate Regulation Bill should include this.” While the real estate sector is yet to get its own regulatory body, one of its key responsibilities would be to eliminate speculation from the property market. Only then will end-users be able to purchase property at genuine, and not artificially inflated, prices. l Article by : praveen singh for Indian Express Posted: Saturday , Mar 27, 2010 at 0053 hrs

29-03-10	#4
vizworld New Member Join Date: Feb 2010 Posts: 1 Thanks: 0 Thanked 0 Times in 0 Posts	Is there something that we as citizens can do Reading this article does provide strength to the general feeling on this forum, that builder nexus is using wrong ways to increase rates. Bad thing is that the solution it provides is for a regulator to appear on the scene. I am not very sure if a goverment managed regulator would in any case try to help the cause of citizens. Is there nothing that we as citizens could do to help each other out in such a situation. Does acts like RTI even work in this field? Why not some NGO work in this field and force goverment to work on the subject for geneal welfare of the public.

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29-03-10	#2
niraj2010 Member Join Date: Jan 2010 Posts: 50 Thanks: 0 Thanked 0 Times in 0 Posts	Two things - 1. Good to see Indian Express carrying out such investigation. There is some part of media at buyer's side. Else TOI keeps on shouting every saturday about how today will be the last day when you can buy flats. 2. Govt regulation in real estate. I dont think this is going to happen and why..who runs this real estate mafia?

29-03-10	#5
compuwalah Senior Member Join Date: Dec 2009 Posts: 915 My Mood: Thanks: 2 Thanked 23 Times in 18 Posts	In this case the prices will fall sharply in case of downturn , but again depends as what ratio of the props are held by such underwriters.

29-03-10	#6
helmak Member Join Date: Nov 2009 Posts: 193 Thanks: 0 Thanked 0 Times in 0 Posts	This article holds true for NCR and all cities in North. For Pune its mostly end-users and this article does not hold true. Mumbai esp Navi Mumbai is very much the way article says.