Builders fail to meet deadlines as home buyers pile up pressure

NEW DELHI/MUMBAI: Delhi-based exporter Raj Kumar Jain bought a Rs 2-crore apartment in Unitech's Grande project in Noida way back in 2007. He was told he would get possession of the flat in 2010. "I have already paid 95% of the cost. But I am still waiting," a livid Jain says. At the project site, there is a grand entrance.

Inside, there is a golf course and club, and skeletal structures of a few tall buildings. Construction is on, but the builder isn't committing on a delivery date yet. Jain's experience with India's second-largest builder is just the tip of the iceberg.

Rising construction costs, labour scarcity and shortage of funds are taking a toll on the real estate industry. Projects are getting delayed and consumer anger is rising as people struggle to cope with rising EMIs. Builders, on their part, say they are helpless - funds are hard to come by and costs are escalating by the day. Typically, the construction-linked payment schedule is front-loaded, with payments done with subsequent slabs getting constructed.

"If their projects don't sell and banks don't lend to them either, most builders will find it difficult to raise cash to complete construction in time," says Rohtas Goel, president of Naredco, a body of real estate developers, and the chairman of Omaxe.

Nearly half of the 930,000 underconstruction residential units in the country, scheduled for delivery between 2011 and 2013, are likely to be delayed by up to 18 months, says PropEquity , a property research firm. Between 2009 and 2011, the cost of construction material has risen nearly 25%. Steel, cement, bricks and labour constitute nearly 73% of the overall cost of an apartment.

Daily wages of labourers have gone up from `250 a day in 2009 to `325 a day in 2011. With increased construction activity in eastern India and the success of the government's rural employment guarantee scheme, there is a severe shortage of construction workers in west and south India. Since November, mirroring the negative news flow around the sector, the BSE Realty Index has slipped 47%.

In comparison, the Sen has fallen 13.7%. Within the realty index, shares of DB Realty fared the worst, falling about 83%, while Godrej Properties was one of the best performers with just an 8% decline. The problem has been accentuated by the sharp rise in delivery commitments. In Noida, the supply has risen from 23 million sq ft between 2008 and 2010 to 135 million sq ft to be delivered between 2011 and 2013, a jump of 487%.

In Gurgaon, the jump is 267%; in Navi Mumbai, it is 154%. When the real estate market bounced back in 2010, after the recession, demand picked up and builders launched new projects in a hurry. "This aggressive expansion has led to delays in projects, as they couldn't focus equitably on execution," says Mayank Himadri, manager, research & real estate intelligence service at Jones Lang LaSalle India.

Himadri says bigger delays are happening in the case of developers who focused on launching new projects or phases in their existing projects at lower prices to attract demand, hoping to sell existing projects at higher prices later.

While eventually they had to correct capital values in their existing projects, slow demand led them to focus on newer projects rather than existing ones. "These older projects can get delayed by 12-18 months, from their initial possession dates," he says.

"In many cases, the builders are also not in a hurry to deliver projects as the market conditions are not conducive and do not suit them right," says Kejal Mehta, real estate analyst at stock brokerage Prabhudas Lilladher. T Chitty Babu, chairman & CEO of Akshaya Homes in Chennai, says the projects in the south have slowed down and there are no major delays.

"The reason why projects are getting delayed in other belts is non-availability of skilled labour. There is a huge demand supply gap here. Many builders are working with just 60% of workers, which is a great threat. Many of them are going for technical help to finish work," he adds.

The builders have taken too much on their plate already - they have to deliver over 1,200 million sq ft over the next three years, say some analysts. They would not have the management bandwidth, support infrastructure, vendor capability or capital to execute projects on such a large scale.

"Even if 60% of this is delivered over the next 2-3 years, it will be a significant achievement," says Anckur Srivasttava, chairman of GenReal Property Advisers, a property consulting firm. The country's largest developer DLF will deliver 11-12 million sq ft of residential space a year for the next few years. "Some of our projects that were to be delivered in 2011 and 2012 may be delayed by 6-8 months on account of delay in approvals, labour shortage, increase in cost of construction and de-crease in cash flow during the slowdown," says Rajeev Talwar, executive director, DLF.

Many of DLF's projects that will see delays were launched in 2008 and 2009, at a time when several projects were stalled due to the recession and even buyers weren't able to pay instalments on time. In fiscal year 2011, DLF sold fewer homes than the previous year. This year, the company is planning to sell non-core assets to bring down debt. A few large real estate players such as Emaar MGF and Omaxe are also looking at alternatives like selling land to generate capital.

"We can also expect a consolidation with many smaller players selling their projects to bigger players," says Goel. Says Samir Jasuja, chief executive officer of PropEquity, "A majority of the projects that are expected to get delayed will be in the affordable and mid-income categories. There will be serious delays in these projects and there might be price escalations for buyers as developers pass on the increased cost."

While developers blame increasing costs and government approvals for their delays, Ernst & Young's real estate partner Rajiv Sahni says many developers today do not have resources to finish projects because most of the equity and debt that they had raised was used to acquire more land.

In other words, money was diverted from the project to other uses. "There are many properties languishing, especially of mid-sized builders," he says. Harleen Oberoi, executive director, project management India at Cushman & Wakefield puts the large figure in perspective. "To develop 1 million sq ft of space, a developer would require a labour strength of 800-1,000 on the site at any peak instance, shuttering of about 2-3 lakh sq ft, one tower crane and one crane, in addition to other plant machinery like concrete pumps, batch plants and digisets."


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