History should not be repeated. Excerpt from the Economic times

NEW ASSET BUBBLE

NCR brokers do a realty ‘check’ again

It is time people defeated this broker nexus. I earnestly plead to all NOT TO BLINK. This will foil thier plans and people will be able to buy houses cheaply.

If Price Bets Backfire, Recovery To Be Hit

Sanjeev Choudhary NEW DELHI

Also around 10000 acres out of a total of 25000 acres of land meant for SEZs around Manesar and Dharuhera by Reliance are being planned for real estate plays. Reliance, to the chagrin of DLF will be doing to the real estate buisness what the private sector did to s. They plan to launch a blitzkrieg of housing projects in the SEZ land for which you must be aware the govt recently amended the policy for increasing the Non -Core activities to 50% from 40% . This was dont at reliance's behest. Also , do not forget DLF bagging 1000 acres on the Gurgaon Faridabad road which is almost as big as DLF-Phase-1. At this price, with an increased FAR , they will be able to launch apaprtments within Rs 2000 per sq feet in this prime location.

THE broker-builder nexus that propelled property prices to unreasonable levels to beguile home buyers in the National Capital Region (NCR) during the realty boom of 2006 and 2007 seems to be back in action.

Brokers are increasingly underwriting properties in new projects being launched by developers—blocking a large number of apartments during so-called soft-launches, hoping to offload them at a premium to end-buyers after the formal launch.

This will help builders claim huge sales immediately and create an artificial scarcity in the market. But if brokers fail to offload the stock to end-users or long-term investors, property prices may take a beating and the nascent recovery in the residential market may be hit.

“End-users are back in the market and we think we will be able to sell the properties we underwrite,” a property dealer in Noida said, claiming he has underwritten several apartments in new projects launched in the area. “Given the interest among home buyers, prices will soon start rising and we can easily extract a premium,” he said, requesting anonymity fearing an exposure could spoil his relationship with builders.

The Indian economy, which expanded by a creditable 6.7% in the financial year ended March 2009 despite a global economic downturn, seems to be encouraging speculators in the property market.

Property prices had fallen around 25% in the past one year in Gurgaon, Noida and Faridabad. Some analysts had anticipated a further correction in prices this year with a large number of property firms announcing launches after a gap of almost two years. The combination of builders and brokers have now managed to keep prices steady despite a huge increase in supply.

New properties in Gurgaon are being offered at around Rs 3,600 per sq ft while in Noida and Faridabad, prices are hovering around Rs 2,925/sq ft and Rs 2,250/sq ft, respectively.

Brokers usually charge a commission from developers, generally 3-4% of the value of the property. But during the boom, several brokers started underwriting properties slated for launch with the backing of a bunch of investors.

The problem started arising when the property market went into a deep downturn and these broker-underwriters were left with huge unsold stock.

Brokers active again



IN MOST cases, brokers managed to dump the unsold stock back on developers, as they had paid hardly 5-10% of the total property value.

With the property slump seemingly close to its end now, brokers have again become active and started underwriting projects. Several developers, including Unitech, Jaiprakash Associates, BPTP, Emaar-MGF and The 3C Company, claim they have been able to sell thousands of apartments since April.

It’s impossible to verify these claims because these companies are either privately-held or don’t give out quarterly balance sheets. Also, since realty companies follow a percentage of completion method (POCM) for accounting, the revenue from sale of new launches starts getting recognised only after a quarter or two. Under POCM, sales are recognised as per the pace of execution and are first shown in books only after 30% of the project is complete.

Unitech, which claims to have sold 3,500 units since April in Gurgaon and Noida, said it is doing brisk sales through its own sales network as well. “There is nothing wrong in using brokers as they are an established channel for sales,” said Unitech’s head of corporate planning, R Nagraju, adding that brokers have not been underwriting their projects and a vast majority of its buyers are end-users.

The 3C Company, another property firm that has launched a project in Noida, claims to have sold 1,100 units in just a month—‘all to endusers’. “Not a single flat in our project has been underwritten by any broker. The moment you do it (get brokers to underwrite), they (brokers) go and sell it to investors. Other developers are doing it, but not us,” said Brijesh Bhanote, the company’s senior vice-president (marketing).

The developers’ claims too are hard to believe. “We still estimate there are unsold stock with developers who claim their projects have been sold out,” said Anshul Jain, India CEO of international consultancy DTZ.

A combination of end-users, investors as well as broker-underwriters are driving the market at present. When the market anticipates prices to go up, more investors and underwriters will enter, which is what is happening now. That is also the reason why underwriting at present is limited to low-priced projects. Brokers are part of all property markets, but developers’ dependence on brokers in the NCR seems to be much higher.

“Traditionally, brokers have played a very strong role in the NCR,” Knight Frank India chairman Pranay Vakil said. Developers have been forced to deal with brokers in the NCR as they would otherwise ‘bad-mouth’ projects, hampering sales, said a top executive of a NCR-based listed real estate firm had earlier said.
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  • Well written article!!

    The builder / broker nexus is surely and steadly comong to the fore. Some of the recent launches of projects in Noida / Gurgaon are proof of this.
    3Cs are nothing but a hoghouse full of brokers .Interestingly, most of the towers/ flats they show as sold are slated to come up in Phase-II.
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  • It is strange, but Reliance coming up in Manesar region will push RE prices up rather than down. Its contrary to usual supply-demand situation. The more an area develops, better it is for RE price, because it makes the area livable and infrastructure improves.
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  • Great Article

    Very well written article buddy
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