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When an India-born doctor with the UK National Health Service decided in 2011 to buy an apartment in a New Delhi suburb, he believed he was securing a comfortable retirement for his parents. The property was advertised by one of India’s largest developers, and he handed over the Rs6m ($89,627) purchase price expecting the place to be ready by the spring of 2013.
But six years on they are still waiting for the keys, his father has had a stroke and only half the “magnificent tower” promised by Unitech has been built. “The government says a lot about how non-resident Indians should invest in the property market . . . and then these are the standards that people find,” says the furious doctor, who requested anonymity, wary of possible retaliation. “How can they expect anyone to invest?”
House price growth in India has slowed and prices have even fallen in some cities over the past two years, after more than a decade of robust expansion. Prices in New Delhi that rose 24 per cent between 2008 and 2014 have since fallen 3.5 per cent, according to data from property group JLL.
Sales are still rising, but an increase in new projects has meant a steep drop as a proportion of total supply. Developers’ cash flow has dried up as a result, says Pankaj Kapoor, managing director of Liases Foras, an independent research house. Now, he says, it would take more than four years to sell existing housing stock in India, compared with just over a year in 2009.
The resulting pressure on property companies has raised questions about the business practices in an industry that has failed to deliver tens of thousands of promised apartments.
Industry executives say that during the boom times, India’s developers used much of the cash from pre-sold apartments to expand their landbanks rather than to build the projects. Many also sold unbuilt apartments without having secured the requisite building approvals from local authorities.
“Developers would take money from buyers and reinvest it in more land — there was a huge hunger for getting land,” says a former executive at Unitech, one of India’s largest property developers by market value, which is now facing a number of court cases for failing to build apartments. “There was money [previously] so there was no issue.”
In the aftermath of the 2008 global financial crisis, money poured into the construction sector from foreign investors. Indian speculators chasing higher returns drove up property prices and builders scrambled to take advantage of demand with plans for developments in up-and-coming cities such as Gurgaon and Pune.
But as supply turned into oversupply in the higher end of the market, companies that had sold apartments in advance to fund the purchase of land for new developments are now facing a liquidity crunch and mountains of debt.
DLF, the property company that together with Unitech spearheaded the development of Gurgaon as a business centre outside the capital of New Delhi, has warned of a “temporary spike in [its] net debt levels”. Net sales fell 27 cent to Rs20.6bn in the three months to December from a year earlier.
Unitech has delayed or stopped construction on 13,337 of 17,053 pre-sold properties. Ajay Chandra, managing director, blamed an “unprecedented slowdown” in real estate for a “squeeze in [Unitech’s] working capital”, according to a statement filed in the Delhi high court as part of a case against the developer. Unitech declined to comment on the court case or the NHS doctor’s situation.
Government data analysed by property consultancy CBRE show that foreign direct investment in construction and development in India has fallen dramatically in the past five years — down 97 per cent from levels in the financial year to March 2012.
“What happens in India is unique,” says Anshuman Magazine, CBRE chairman for India and south Asia. With no regulations so far on how money raised from pre-sales can be spent, “most of the developers are used to starting to sell properties as soon as they put shovel to the ground”, he says.
As anger mounts and developers flirt with crisis, the government has been forced to intervene. State authorities in Haryana, for instance, are examining ways to reduce local fees and streamline rules. The central government, meanwhile, is moving to ensure greater protection for consumers. From May, developers will be barred from selling planned homes until they have full approvals from local authorities, and 70 per cent of pre-collected money must be held in third-party accounts, not reinvested in land.
However, Shobhit Agarwal, managing director of capital markets at JLL India, says requiring pre-approvals could make it impossible to build, noting it is already rare for projects to be completed on schedule. “It’s a mindset in India to say that the project is not going to deliver on time.”
Some developers are optimistic. “Bring in transparency and streamline the whole piece and it’ll attract greater foreign direct investment into the country,” says Anita Arjundas, chief executive of Mahindra Lifespace Developers.
However, for many investors it is already too late. Says the aggrieved NHS doctor: “I wouldn’t spend even a penny in India.”
