Between the Devil and the Deep Sea. Government please help!

Sanjeev Kathuria(Founder, Author & CEO at Torbit Consulting) - September 08, 2021 - - 0 |
Between the Devil and the Deep Sea

Caught between a reservoir in front, and a ditch behind, is pretty much the situation the Real Estate Market (REM) finds itself in. REM certainly seems to be in trouble, as it is unable to take a step forward or backward. Not a day goes by when the social media does not carry horrifying stories haunting REM.

It’s not just the consumers but also the developers, regulators and other stakeholders who are struggling in one way or the other. The struggle for existence within the industry under the changed environment, and on top of that the jolt of the continuing pandemic situation seems like a death blow and the REM surely seems to be on the ventilator.

While the regulatory authorities meticulously planned cities with proper zoning, keeping in view the need of infrastructure requirement to aid growth, the financial institutions and developers did not account for slowdowns for various reasons.  The slack, deceleration or downtrend, attributed in the main to the pandemic, resulted in national surprises whether in terms of policy changes or unimagined financial crisis.

Regrettably the pandemic and its fallouts are beyond anybody’s control. My heart weeps for the consumers and I am equally concerned about the grim situation the developers have been reduced to.

Today it is despairing to see unfinished buildings all over, with NO construction anywhere in sight. Actually, the problem is graver than it seems – the developers have sold their inventories, but do not have the required cash flow to complete the buildings, for the surplus generated from the sales may have been utilized for expansion or elsewhere.

The consumers too are in a super tough situation – they may be paying rent, and may be required to pay EMIs, but as a result of the pandemic may have lost jobs, seen salary cuts or salary delays. Legal remedies can only do so much and not beyond.

How do the developers come out of their predicament?

Unfortunately, the remedy, which the developers are seeking, is creation of new inventories and sales, so that some money can be mobilized for completion of the unfinished projects. But the challenge is that firstly RERA does not allow money to be moved from one project to the other; secondly whatever little can be moved does not help generate the money required to complete the ongoing projects stalled for lack of funds; thirdly this may be a short-term solution since the developers are further creating liability in the construction of the new inventories.

Notably the above exercise is only feasible with branded developers who can leverage their brand value and sell new inventories, whilst the old are stalled or delayed.

What should the developers do?

The developers must NOT launch any new inventories, whilst the old launched projects are stalled or delayed, because they will not sell easily and moreover it will fuel the anger of the old grieved customers who would step out to tarnish the brand value.

“Aage Kuan Piche Khai, Sarkar Madad Kar Do Bhai!”

[The regulatory authorities have become super vigilant and are all geared up to protect the consumers.  In a recent order UP RERA refused to give approval to a developer who had defaulted on delivery in the past. This is a big step to caution the industry that only people who deliver will remain in business and others will have to pack their bags.]

The developers need to accept business errors and blunders, and step forward to collaborate with builder colleagues who have clean balance sheets to execute the balance work on the stalled projects, so that they can be handed over.

The developers need to cut organizational expenses, reduce debt from sale of inventories, even if some loss on profit is to be borne, and share the profits with the fellow builders. The developers must also seek help of financial institutions in restructuring the debt and the repayment plans. The customers must check the financials of the projects, even if they have to contact the financial institutions and verify the feasibility of the projects before investing.

I visualize a strong regulated Real Estate Industry, with credible players driving into the next decade. Importantly, there will be immense opportunity for the developers, financial Institutions, Investors, and the consumers will be in a position to buy their dream homes or commercial establishments without fear of losing money!

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