As banks turn more stringent in disbursing loans and customers turn more choosy and vigilant, real estate developers are focusing on execution to boost cash flows and build a pedigree of delivery.
‘’Every developer has sold a lot of stock. Now is the time to deliver,’’ said a Pune-based builder. In fact, the developer has no choice but to deliver as many projects have been delayed: projects that were to come up last year, are being delivered this year.
A key driver is the Section 80IB(10) benefit under the Income Tax Act, which was valid till April 2010, but was extended for a year. ‘’Projects have to be ready by April to qualify for Section 80IB benefit, ‘’ said a senior executive with a real estate major.
If a project met the Section 80IB criteria—residential units with a built up area of up to 1,200 sq ft—the developer was eligible for a rebate on income-tax. It had to just pay the minimum alternate rate (18 per cent), which is a big saving. The Section 80IB benefit was extended in April 2007 to promote affordable housing.
Also, banks have become very stringent, they have linked loan disbursals to progress in projects, say builders. Most customers book by paying 10 per cent of the flat cost and pay through construction-linked plans. To ensure they keeps paying and recover rest of the money, the developer has to show progress as his cash flow is linked to same.
Vineet Nanda, senior vice-president, Central Park, says that ‘’as cash flows strain and banks tighten lending and confidence is shaky, builders have to focus on execution.’’
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Banks are also beginning to enforce the escrow mechanism, says Ashwini Prakash, executive director, Paramount Group, a Noida-based builder. Whatever money a customer pays now goes into an escrow account that is used to service the loans. The escrow mechanism has been in place for some years but banks did not enforce it.
There’s another important element that’s driving change: penalty clauses. ‘’Today, the builder knows if he’s not able to deliver a project on time, he will have to pay penalty or could be taken to court,’’ said the CEO of real estate fund. To boost sagging consumer confidence post-downturn, developers had began offering penalty clauses for delays.
Spoilt for choice, customers today often go by pedigree and builders realise this. ‘’Today, builders are launching many new projects, some of which they could not launch in bad times, pedigree of delivery becomes important. The customers are educated and is spoilt for choice. They want to know if the builder had launched four projects, did he deliver them on time,’’ said an Omaxe official.
‘’If projects are delayed, the brand suffers, costs shoot up and we have to pay penalty. ..Your history goes along with you. People who are conscious of their reputation, have to show delivery, or how they will get customers for the next project,’’ said Prakash.
In 2009, execution suffered as many developers had diverted money from booking of flats in projects to buy land in other areas. With the onset of downturn, funding sources dried up. Customers who had booked flats became jittery and began defaulting. Banks had to restructure and reschedule loans and developers had renegotiate with buyers.