Real estate developers may soon adopt a build-and-sell model for their residential projects—a complete shift from the current norm of selling homes at a preliminary stage.
A prolonged slowdown, coupled with the implications of the regulatory regime under the new real estate law, may compel realty firms to construct the project or at least a part of it before selling to customers.
With the Real Estate (Regulation and Development) Act of 2016 (RERA), currently being notified by various states, the entire pre-launch stage will be eliminated, and a project will be launched only after obtaining all approvals, which is a lengthy process.
“It makes a lot of sense to implement the build-and-sell model going forward. With RERA, pre-launches will not happen, and developers won’t be able to test the market in terms of pricing or product. Though they would need to arrange the financing, they would prefer to rather build a substantial part of the project and then sell it to buyers,” said Irfan Razack, chairman and managing director, Prestige Estates Projects Ltd and chairman, Confederation of Real Estate Developers’ Associations of India (CREDAI).
Sales of ready properties have shot up significantly in the past one year, compared with under-construction ones, as customers increasingly chose to buy completed projects due to growing uncertainty in the real estate market.
With RERA kicking in, the Mumbai-based Wadhwa Group is looking at restructuring land transactions in such a way that payments are less at the pre-construction stage of a project. In this way, developers can borrow more for starting construction and reaching a stage where they can confidently launch under the new guidelines, provided the approvals are in place, said a company executive.
“We will be looking at selling more at a brownfield stage where about 30-40% construction is completed than at greenfield stage. It is far safer to launch through a build-and-sell model. We are trying to achieve a structure where bare minimum is given before construction stage so that the cash flows can be used to execute the project quickly,” said Vrushank Mehta, head of corporate strategy and land acquisition, Wadhwa Group.
The developer plans to adopt this model in the two or three projects it has lined up for launch in the near future.
Interestingly, India’s largest developer DLF Ltd was the first to say that it will fully build its residential inventory before selling it to customers. In a subdued national capital region (NCR) market, this is a move that will also attract better premium on pricing for completed homes.
The company is creating finished, un-launched housing stock that will be sold when the demand scenario improves.
“In DLF’s case we could afford to hold on to the inventory, because we have a large rental portfolio to support. By this model, we get maximum value realization, avoid delays and other litigations that follow and delivery is not an issue,” said DLF chief executive Rajeev Talwar.
Under the RERA regime, developers will have to rely heavily on external financing as pre-launches of projects, through which builders collect 30-40% of their funds from property buyers before they obtain the required approvals, will stop.
Talwar said it shouldn’t be an issue if developers exercise discipline and manage their cash flows well. “Build-and-sell is going to be the best route. The size of the projects may reduce slightly as a result of it but whoever can afford this model, should adopt it. We would like to go for build-and-sell but to adopt it, we have to get our funding in place right from the beginning or have equity partners,” said Neeraj Gulati, managing director, Assotech Realty Pvt. Ltd.
The company plans to wait and watch for the next six months on how the real estate regulation is implemented and how the market shapes up in the next few months, Gulati said.
ASK Property Investment Advisors, the private equity arm of financial services firm ASK Group, for instance is raising a Rs2,200 crore special situation fund to invest in residential projects.
“Most developers believe that only if they complete or build significantly, will they sell. They want to focus on a few projects and capitalize them to sustain through the period of construction. The new fund is designed to give money for this purpose but ensure every penny goes into construction of the project,” said Sunil Rohokale, chief executive and managing director of ASK Group.