Stay informed with free updates
Simply sign up to the Property sector myFT Digest — delivered directly to your inbox.
Hundreds of Indian property developers could be forced to shut up shop as a result of tough rules introduced this month to protect homebuyers after repeated failures to deliver promised apartments.
The regulations are an attempt by the Indian government to rein in irresponsible developers that have flourished under a lax regime, using cash from pre-selling apartments to cover overheads and buy land, rather than construct homes.
Venkaiah Naidu, India’s minister of housing and urban poverty alleviation, says the regulations will “remove the taint” on the sector. The rules will demand that developers secure full approvals before selling homes, pay interest to buyers for delays, and put 70 per cent of pre-collected money into escrow accounts, so it can be used only for construction and land costs. Developers who infringe these rules can be jailed for up to three years.
Analysts say the rules could spell the demise of many of the sector’s 11,000 businesses, as the construction industry grapples with an inefficient bureaucracy, an oversupply of luxury homes, and the high cost of land that comes with onerous requirements for developers.
“People will exit the industry,” says Anshuman Magazine, chairman for India and south Asia at CBRE, the real estate group. “There is a possibility of a supply crunch . . . if the market doesn’t pick up and you put the regulations on top of it and the funding situation doesn’t improve.”
With money sequestered into escrow accounts under the new rules, and no penalty for state bodies that delay or withhold approvals, developers say too much of the burden has shifted on to their shoulders.
“If I buy a parcel of land and I have to wait six months for approvals, I have to carry land and construction costs,” says Anita Arjundas, chief executive of Mahindra Lifespace Developers. “There are also the costs of consultants and approval consultants, approval costs, and then you have sales and marketing costs.”
Small developers without the financial muscle to fund their own operations will struggle most, says Pankaj Kapoor, managing director at Liases Foras, a research house. But even India’s largest developers say the new rules pose a significant challenge.
DLF, India’s largest listed real estate developer, is one. The cash-strapped company, whose net debt rose to Rs244bn ($3.8bn) in the third quarter — up 14 per cent from the same quarter last year — says it will retreat from residential real estate because of the regulations.
“We are not looking at entering any new [residential] market,” says Saurabh Chawla, the group’s executive director.
In some states property developers need up to 50 approvals for a project, a process that can take months, or even years, to complete. Even after a property has been built, it needs final clearances that companies say are frequently delayed by months without explanation.
Now, instead of building residential property, Mr Chawla says that for the next two years DLF will build office blocks and other commercial real estate, while it raises money to comply with the new rules. The decision marks a change of tactics for the company, which “primarily focuses on the development and sale of residential real estate”, according to its annual report.
Unitech, one of India’s largest property groups, is likely to be hit. Last month the brothers who run the group, Sanjay and Ajay Chandra, were arrested on charges of fraud amid claims they cheated buyers of flats in one of their residential projects near the capital New Delhi. The company has delayed or stopped construction at 13,337 of 17,053 pre-sold properties, blaming a “squeeze in working capital”, according to a statement filed in the Delhi High Court.
Ramesh Nair, chief executive of property consultancy JLL in India, believes the rules will drive consolidation among developers, who proliferated under a lax regulatory regime. “The impact of this is huge,” he says. “The number of developers will come down dramatically to deal with these strong consumer protections.”
But Vivek Tyagi, who is still waiting for construction to begin on an apartment he bought in 2012 with an advance payment of Rs480,000, says the new regulations might prove just another box-ticking exercise from a government keen to show it is on the side of ordinary people. “In India it’s not the law that’s the problem,” he says. “It’s the implementation of the law.”
