Factors causing delays in under construction projects

“When will the project be completed and when can we expect possession?” This is the first query for a ny homebuyer and a major concern for the Indian realty sector now. With thousands of buyers taking to the streets to protest against incomplete projects and consumer courts busy penalising developers for not delivering houses in time, delay in the delivery of projects is undoubtedly one of the major pain points for the end users — one that has made the prospective homebuyers extra cautious. The top seven cities in the country have over 1.5 million units delayed between 14-30 months and over 25 per cent of the under-construction projects in NCR are delayed. According to figures provided by real estate consultancy PropEquity as many as 7,391 residential projects, out of 9,591 projects launched between 2008 and 2010, have not been completed even though the developers had given the time period of 36 to 40 months for completing and delivering these.Demand for houses  or housing shortage, however, seems to have no connection with their completion and delivery as Mumbai, which has one the most robust markets when it comes to demand for residential units has 2,567 delayed projects. The Mumbai Metropolitan Region (MMR), is followed by other high demand destinations like Pune with 1,254 projects, Bengaluru with 1,205 projects and National Capital Region (NCR) with 784 projects.

 

What causes delay

Cash crunch faced by the developers due to poor sales and a prolonged slowdown is a major factor cited for delays. “Residential real estate sector is witnessing project delays as high as 25–30 months in the major cities. In general, one of the reasons for project delays is the severe cash crunch faced by developers in an environment which is challenging for fund raising”, says Shveta Jain, Managing Director, Residential Services, India, Cushman & Wakefield. But the arithmetic of delays is not so simple in India. One cannot overlook the siphoning of funds from one project to another by the profit-hungry developers and the lengthy approval procedure that developers have to follow before starting a project. “The reasons for delays are many. It starts from the delays in approval process, to lack of professionalism and experience at the end of the developer, and default in payments by customers”, says Prateek Mittal, Executive Director, Sushma Buildtech Pvt Ltd.“Unavailability of skilled labour, construction material and funds are the main reasons for delays. These can delay any project by 1 to 1.5 years”, says Anuj Goel, Executive Director, KDP Infrastructure.Pointing out siphoning of funds as a major culprit and something over which buyers have had no check so far Dr. Anil Jindal, MD, SRS Real Estate, says, “Almost 90 per cent purchase in under-construction projects is through home loan. All home loan providers disburse 80-90 per cent of home loans by the time the super structure is ready under Construction-Linked Payment Plan. At this stage, builders start funding other projects from this specific project”. “Inventory is also a headache for builders due to slowdown. If the inventory is unsold after completion, then it harms the reputation of the builder and may impact builder’s return. The buyers don’t prefer unsold inventory in a newly constructed property”, says  Jindal of SRS Real Estate.

 

Are the deadlines unrealistic

Real estate is a highly competitive market as a majority of the developers nowadays are offering projects that have very little difference in quality and amenities in a particular segment. In such a scenario when there is too much pressure on a developer to sell his inventory, he tries to gain mileage by claiming to complete a project in the fastest possible time. As a result most of the new launches mention 24 to 36 months as the completion time. “There is competition on this front as if a builder in my vicinity says that he will complete the project in three years, then I have no choice but to claim the same so that the buyer chooses my project as everyone wants to get possessions fast. But on ground the reality is that anything less than four to four and a half years is very difficult to achieve”, says Amit Modi, .Amit Modi, Director ABA CORP and Vice-President CREDAI western UP. He says that the buyers should also have realistic expectations and should be ready to wait for at least five years in case they are investing in a newly launched project. It is, thus important to know the basic construction timelines. “Completion of a structure is the only stage which the developer can complete fast and depending on the size and scale of a project and tower it can take between 12 to 24 months to complete the basic structure. Finishing and fittings take almost 40 to 50 per cent of the total completion time.  “Once a project starts, it takes 2 to 2.5 years for the completion of structure and then again 1.5 to 2 years more for completion”, says Aakash Setia, Director, Mona Townships. “For a high-rise project, depending on the height and size of the project, anything between three to five years is the realistic timeline. We have delivered multiple high-rise projects in 3-4 years time”, adds Prateek Mittal.What needs to be doneThe real estate regulator Act, however, will address some of the reasons for delays as now the developers have to ensure that funds collected for one project are not used in any other project. Single-window clearance for approvals is also likely to become a reality soon. “The clause to set aside 70 per cent of the funds collected from buyers in a separate escrow account as per the Real Estate Regulation Act, which is expected to come into effect in 2017, will keep a check on siphoning off the funds allocated for a particular project’s construction and ensure that they are not held for want of funds”, adds Jain.“A system via which a regular communication and update on the project can be made known to a buyer, needs to be developed in order to create transparency within the sector” .“In order to minimise delays, one can revise construction linked payment plan and hold back 20-25%. Home loan payment of builder for last leg, that is, interiors and finishing after the construction of super structure”, says Jindal.Buying property under Possession-Linked Payment plan is also a good option for buyers to minimise their financial liability in case of a delay.Builders on their part can maintain confidence of buyers by not giving them false hopes and fulfilling the commitment. “If a project will take 5 years to complete, let the buyers know about it. Use best quality products and make sure that the project gets completed on time”, says Jindal.“Resource planning by developers is another measure than can be done to allocate resources as and when needed. Preparing time bound contracts with penalties with vendors, suppliers and contractors”, adds Goel.

 

Danger signs

In a delay-ridden market buyers always want to know  the signals that hint at a project headed for delay. Funding source of the developer is a major source to assess a possible project delay. “Projects which are marketed on the basis of funding by a financial institution / private equity player are less likely to suffer on account of a liquidity crunch”, says Jain. Also, past track record of execution and delivery should give a signal towards any possible project delay that the buyer needs to check. “A track record of multiple delivered projects by the same Group in the same region, gives a fair idea about the planning of the developer”, says Mittal.Regular project monitoring with respect to construction milestones promised by developers at the start of the project can help buyers to gauge if a project is headed for a delayed completion.

With a view to ensure timely delivery of apartment to the allottee, the Housing and Urban Poverty Alleviation department has firmed up draft rules under Real Estate Act which explicitly incorporate such commitment in the agreement to be signed between promoter and buyer.In the Draft Agreement for Sale Rules, under the Real Estate (Development & Regulation) Act 2016 “timely completion and delivery of the apartment or plot to the allottee is made the essence of the agreement to be signed between the promoter and allottee,” an official release said.To be applicable for UTs of Chandigarh, Andaman and Nicobar Islands, Daman and Diu, Dadra and Nagar Haveli and Lakshadweep, these draft rules will now be placed in public domain for comments and suggestions before final notification.The Draft Agreement for Sale Rules specify roles, responsibilities and obligations of promoters and allottees.The Draft clearly stipulates that “the promoter agrees and understands that timely delivery of possession of the (apartment/plot) is the essence of the Agreement,” the release said.Under the Draft Rule, a promoter is required to clearly indicate the date of delivery to the allottee in the Agreement itself.However, there is a provision for extension of this date in case of delay caused due to war, floods, drought, fire, cyclone, earthquake or any other calamity caused by nature.Agreement would also mention the date of grant of commencement certificate, land title, number of storeys and plots in the project, carpet area and common area, and total price, among others.

Source: Tribune India

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