SAMIR JASUJA writes on the delays plaguing projects and areas developers can focus on to ensure faster project execution.
To say delays in execution have become a perennial problem across Indian real-estate markets would be stating the obvious. Today, thousands of home buyers who aspired to own their dream homes have been left in a quandary, as projects have extended beyond deadlines. Continuous execution delays along with high unsold inventory and unrelenting pricing have created a ´trust deficit´. As a result, buyers have been wary of making fresh purchases, preferring to wait it out.
Of the total 10,608 projects that came up for possession between 2013 and April 2016 across key cities in India, 4,035 projects (38 per cent) are still under construction with an average delay of 24 months. Total supply languishing with significant delays is 659,268 units.
There were further 3,155 projects with a cumulative supply of 435,457 units, which were completed with an average delay of 13 months during the said period. The NCR has fared the worst in terms of project delivery. Of the total 3.8 million units committed between 2013 and April 2016, only 45,481 units were delivered on time. A total of 619 projects with 211,604 units were delayed by an average 26 months. Within the NCR, Greater Noida (71,968 units) and Gurgaon (60,516 units) had the maximum delayed supply, while Faridabad topped in terms of highest delays in months (31 units). Gurgaon had the worst execution ratio (15.2x) of delayed supply (60,516 units) to on-time delivery (3,867 units). Greater Noida was second worst at 6.6x with delayed and on-time delivered supply of 71,968 units and 10,957 units, respectively. The MMR echoed similar pains in delivery with 204,893 units delayed by an average of 25 months. Thane had the highest delayed supply of 94,974 units, delayed by 23 months. Mumbai had a delayed supply of 59,748 units, delayed by 28 months - the highest in the MMR region.
In comparison, the southern cities of Bengaluru, Chennai and Hyderabad have achieved a favourable ratio (0.98x); meaning, they have delivered more (142,753 units) than they have delayed (139,352 units). In Chennai, a total of 47,682 units were completed on time, as against delayed supply of 37,857 units. Likewise, Hyderabad also saw a higher on-time supply (28,582 units) than delayed supply (27,770 units). In Bengaluru, a total of 66,489 units were completed on time; while a slightly higher supply of 73,725 units was delayed by an average 20 months. Pune had shown similar figures to Bengaluru though delayed supply was slightly higher at 74,365 units.
So, why do delays in projects occur? Are the developers completely at fault or do broad market conditions beyond their control hold sway? The answer could be a mix of both.
Delay in regulatory clearances is widely perceived as the single biggest reason for delays. Lack of a single-window clearance means developers run from pillar to post to obtain over 50 permissions just to begin construction. Holding the land for months during the approvals phase adds to unwarranted escalation in project costs. Further, rules and regulations that vary across states make matters even more complex.
Also, sourcing of funds has become more challenging. With sales across markets hitting an all-time low and banks turning more cautious, developers are grappling to find alternate funding options to complete projects under construction. As per RBI Data, advances to commercial real estate have been stagnant at 2.8 per cent of non-food credit over the past two years. While there are hardly any real-estate IPOs, most PE transactions have been debt-structured or are being funded at project levels. Then, there are needless litigious issues adding to delays. On the Dwarka Expressway in Gurgaon, projects worth ~ Rs 43,900 crore of saleable value have been affected in years of litigation. The expressway, which was supposed to be completed before the Commonwealth Games in 2010, is still unfinished six years hence. Likewise, construction work in Noida Extension progressed slowly till last year, owing to uncertainty regarding farmer litigations. More recently, NGT banned all construction within a 10 km radius of the Okhla Bird Sanctuary.
In the MMR, construction work for Navi Mumbai Airport was to start in 2011, but has not commenced to date, owing to clearances.
For developers, lack of proper planning and poor project management are key issues. Historically, NCR developers have launched bigger projects than developers in southern cities, making themselves more vulnerable to delays. This is especially true for small or first-time developers.
Further, projects are often launched with weak fundamentals. And, when sales turn sluggish, developers intentionally slow down the construction pace. Payment plans are often structured to extract maximum funds till superstructure work is complete and then funds are diverted to purchase fresh land, curtail debt or revive other stuck projects. It could simply be lack of commitment to timely completion.
Encouraging steps by the government
Traditionally, homebuyers have been on the receiving-end with no regulator in place. However, with the Real Estate (Regulation & Development) Bill 2016 becoming a reality, things are turning optimistic for both home buyers and the sector in general. Provisions like keeping 70 per cent of the sales money from a project in a dedicated account that cannot be used elsewhere will keep fund-diversion in check. Further, pre-launch practices will become history, as the Bill restricts an official launch till the project is registered with the regulator. At present, builder-buyer agreements are heavily loaded in favour of developers with an abysmally low delay penalty. Through the Bill, the government has proposed a level playing field by introducing 11.2 per cent interest to buyers in case the developer delays possession.
Now, the government must work to streamline an approval mechanism and single-window clearance. There will be serious operational challenges if systems, in terms of smooth coordination between local bodies and central regulators, are not in place.
The road ahead
Sadly, project delays are becoming the new norm across markets, owing to issues from all quarters. We understand that solutions to fundamental problems such as approvals and funding cannot be expected overnight, but the conditions are not encouraging enough. Implementation of RERA will ensure information symmetry between developers and consumers with good practices, boosting transparency and confidence, but developers will face challenges like compliance issues for their ongoing projects or projects partly sold and increased reliance on external capital, which is already scarce. Thus, there is an urgent need for developers to explore alternate financing options. Besides dealing with funding issues, upgrading their project development or management skills, optimum portfolio size and better understanding of fundamentals will hold the key to faster execution.
About the author:
Samir Jasuja, Founder and Managing Director, Propequity, is a first-generation entrepreneur, investor and innovator. In a career spanning 22 years as a serial entrepreneur, he launched PropEquity in 2007, which today covers more than 65,000 projects of 16,000 developers across 42 cities of India.