Impact & Benefit Duality from the Subvention Scheme for developer and home buyer.
Authored by Tushad Dubash, Director, Duville Estates
Real Estate as an Asset Class for Investment has a tripartite relationship between the economy, the developer and the home buyer. Its contribution to the GDP cannot be understated, neither can the impact to the developer and to the home buyer. Project Life Cycle Management necessitates the requisite sales off-take, which for the developer impacts launch of new inventory into the marketplace and other pipeline projects. For the home buyer, there is methodical planning that goes into the adjustment of investment goals, reallocation of finances and savings planning. While the peripheries of the top cities are increasingly gaining ground and witnessing population migration due to lower capital values, the central micro-geographies continue to retain their appeal to specific niches of well-heeled audiences but also to the millennials who are time impoverished and prefer a minimal commute.
While there has been inventory launched into the market, the larger concern is the inventory overhang. And this is where financial instruments and payment structuring mechanisms designed to postpone payments need to be made. This helps reduce the immediate financial impact on the home buyer. For the developer as well, it ensures that there is sustained traction for the project and continual sales momentum. The subvention scheme helped propel inventory offtake and reduce inventory overhang across markets.
The direction issued by the NHB came about primarily due to the multiplicity of complaints that were raised citing fraud by various builders using subvention schemes. There are two parts to this allegedly. One that builders were getting prospective home buyers to put a higher initial down payment towards the purchase. Second, on minimal construction progress, they were raising
demand letters for higher construction progress then what was completed. Post receipts, the construction progress subsequently stalled. In an industry infamous for delayed possession timelines, this further aggravated the count of stalled projects. Barring a handful of real estate developer brands who diligently used the subvention scheme to help accelerate offtake, there were the many who flouted regulations and failed to comply with the construction milestones.
Under the subvention scheme, the developer absorbs the EMI until possession which purportedly provides the home buyer with the reassurance that they did not have to pay anything out of their pocket until possession. But as has been witnessed, the possession date was being continually shifted. And while this meant a higher cost of interest burden being absorbed by the developer, it also meant in parallel that the homes were never being delivered on time only worsening the statistic of the number of projects that were lying incomplete by various builders. While the subvention scheme was a huge confidence building measure for the home buyer, the protracted delays have only left the industry reputation further tarnished.
Many developers who were using the subvention scheme to primarily offer relief to the home buyer during the construction period find themselves restrained for no fault of theirs. But, the bigger concern is that what would have allowed for higher offtake and momentum will now be severely dampened with this directive and only arrest whatever recovery was being witnessed. This will also lead to real estate developers being confronted by a liquidity crunch. The irony of the subvention scheme is that while it allows home buyers to buy paying no EMI until possession, it also compels them to make their decision on paying a higher price per Sq. Ft. as inevitably the interest cost is loaded into the selling price. Consequently, home buyers who are not hedging would rather make the purchase based on a significantly lower price per Sq. Ft. rather than have the interest cost absorbed. This helps separate the home buyers with real buying intent vs those hedging.
Developers very often have as part of their off-take strategy, a pre-determined number of apartments that can be sold over a pre-determined time period under the Subvention Scheme.
The size of the unit and its ticket size also become important determinants under the subvention scheme wherein the developer could be asking for a higher down payment, sometimes as high as in between 20 and 25%. Again, the benefit articulation from a marketing communication campaign becomes vital as there is interesting differentiation that can be created to draw prospect home buyer’s interest. For the investor segment that is hedging their returns, the individual strength of the project would matter significantly as they have received a significant appreciation from their time of purchase until the time that the project is completed. The subvention scheme is not always as problematic as claimed simply because HFCs have wizened up to the aspect of failure of interest payment collection and hence they operate in a far more efficient manner by simply subtracting up front the interest component that would accrue. Further, developers are operating in a manner where they do not extend their stake too far. Therefore, the subvention scheme is time-bound and not indefinite. So, the EMIs get paid for example only until six months from possession.
Though NBH’s well-intended move to resolve the prevailing complaints of fraud by few builders was directed to protect the home buyers; the ban on these subvention schemes which reduced buyer’s financial burden will lead to slow down in the sales velocity and increase in the unsold inventory. The directive also contravenes the RERA Act, 2016 which seeks to protect the home buyers, give a boost to investments, regulate transaction related to projects and ensure their timely completion and handover.
The industry which is beset by problems of heavily delayed projects should witness a rigorous monitoring of these under-construction projects by HFCs and bring in a regulated and process-oriented mechanism that will focus on project execution. The primary objective of making loan disbursements by the Housing Finance companies strictly linked to slab-wise construction progress of the respective project would be better adhered to and subsequently bring down the prevailing fraud cases to protect the home buyers.
The industry is looking for measures to help accelerate the momentum and this move to end loans for subvention schemes will further tighten the noose in an industry already reeling from a liquidity squeeze.