Today, prospective home buyers don’t want to invest in under-construction homes and see their money getting stuck. It is because of this precise reason that there has been a sharp decline in the off-take of under-construction homes. On the contrary, there is a growing demand for ready-to-move homes where buyers don’t run the risk of losing their capital.
Moreover, they get what they pay for in terms of space, amenities, specifications and quality. It’s here that the Build & Sell model comes handy. In this backdrop, India’s largest real estate developer, DLF, is mulling this new model instead of marketing under-construction properties as most of them face long delays and there are issues pertaining to the quality of construction.
The recent enactment of the Real Estate Regulation Act (RERA) may well give the required push to the Build & Sell model as one of the key provisions of the law, cleared by parliament last year, with a May 1 deadline for its notification by states, relates to severe punishment – including jail terms – for defaulting on timely completion and delivery of projects. Also, only those projects with prior regulatory approvals can be sold to customers under the new law.
Leading real estate firms, like Mumbai-based Hiranandani and K Raheja Group and Bengaluru-based Brigade Enterprises, are fine-tuning their development model/strategy, in line with RERA, by making their staff conversant with the provisions of the new act, besides taking the services of RERA-compliance experts to ensure that project approvals and construction happen in accordance with the law.
Key players like DLF have been putting proper systems into place and outsourcing project work to outside professionals and project management consultants. The companies are also deploying technology to speed up construction. Real estate experts believe that sound development strategy and efficient processes are the key to stay on the right side of RERA. This will also prove to be enabling framework for the Build & Sell model.
Today, the model has assumed greater significance as the earlier practice of developers raising construction finance from property buyers before required regulatory permissions were in place has been banned under RERA. Even 70 percent of construction-linked payment received from customers has to be put in a project-specific escrow account and cannot be deployed in any other project.
However, there are various hurdles before this model, including expensive land acquisition. Since land forms a major part of the project cost, for adopting Build & Sell model, it is desirable that the developer has land with him or, alternately, entering into partnership with land owner would come handy. Especially as there is no bank funding available for land and bank funding for real estate projects doesn’t come easily.
A reputed developer, with credibility and good track record, stands a better chance of adopting this model as he has greater access to funding, including cheaper bank funding. The success of this model will also largely depend on significantly reducing the development cycle by using technology and by better project monitoring and project management and in turn bringing down the project cost.