Thursday, September 27, 2007

Unfinished realty - Builder delays, customer pays

Business Standard reports
What do developers do when apartments aren’t finished on time? Some pay back their clients as part of a penalty clause.

It is a tussle between builders and home buyers that never seems to end — delivering projects on time. There are umpteen cases where builders have taken extra time to finish projects while leaving home buyers to suffer fiscal setbacks.

Imagine a situation where you’ve booked a house in an apartment complex while paying hefty EMIs, and also the rent for the place that you currently occupy. Any delay in getting into your own house obviously means a financial loss.

The only change today is that builders now have a penalty clause in their agreements with buyers. But that is not mandatory yet.

There have been cases earlier where people have contested builders in courts but in most cases that is a long protracted battle which not many are willing to go through.

S K Virmani, manager, National Consumer Helpline, tells us that there are cases where people have complained about delayed possession of apartments but these are not highlighted because there is no effective redressal available.

DLF’s group executive director, Rajeev Talwar, explains that larger developers have an image to protect and to show their commitment they include a penalty clause in agreements. Omaxe too, for instance, provides a penalty clause in its agreements.

Take GurgaonOne, a residential project by Alpha G:Corp, that has been delayed because it hasn’t yet received a completion certificate. The company, however, is paying a penalty according to the agreement — Rs 5 per sq ft per month.

Going by the developers’ side of the story, there are numerous causes for delays — “government approvals, getting the completion certificate, raw material delays, cement and steel procurement, manpower delay”, reasons Anuj Puri, chairman and country head, Jones Lang LaSalle Meghraj.

Getting local approvals is a harrowing task and the new Environmental Impact Assessment clearance that is now mandatory can even take up to nine months .

“At any point in time, there is a 50-60 per cent shortfall in unskilled manpower in the market,” says a source in a large development. Civil contractors executing projects have so much on their plate that managing different projects is becoming difficult.

According to industry watchers, most developers face project delays. “About 85-90 per cent projects are delayed in some way or the other,” they say.

Talk to the spokesperson of Sahara Infrastructure and Housing, Suryavir Singh, and he will tell you that a lot of the delays are not in the developers’ control.

For a developer any delay means rising interest and construction cost. One of the company’s projects in Gurgaon, Sahara Grace, has been delayed by 4-5 months because it hasn’t got a completion certificate from the authorities in Gurgaon. The agreement does include a penalty clause.

“We have given the buyers a leverage to pay us late,” he says. But Sahara, he says, will not take the blame for the delay by the authorities and so will not pay any penalty.

Singh also says that in smaller cities the authorities themselves do not have a clear idea about what to sanction and what not to. That process takes time because in many cases they themselves have to educate the authorities.

But this is not only in the residential sector. According to Srinivas Anikipatti, regional director, Colliers International, in the office and retail space segment, delays might effect the budget of a developer, increase the construction and storage cost and hit the brand image of the company.

Of course, it has a direct impact on end-users as well. “Retailers follow a cycle of business and a lot of them start a new venture around these cycles that usually start around Diwali or Pongal when they can create a hype. The launch period is very critical,” he adds.

For international retail trying to enter the market, delays could mean plans, manpower projections and design lines going awry.

Anikipatti explains that in a project in which the client has given a minimal advance, the pressure on the developer is far less compared to a heavy advance situation. “The clients’ capital is stuck and they can’t go anywhere,” he says.

In such a situation, strict penalty clauses are imposed. In a built-to-suit project in Pune, a Bangalore-based developer had to waive off six months’ rent for the occupier for delivering late. “If there is an agreement, they have to honour it,” says Puri.

This is one reason why clients rely on bigger developers who are sure of their deliveries. “There are a lot of externalities in the process today. A developer might be forced into a delay, but you have to plan for it and that is where experience and brand name matters,” says Talwar of DLF.

“In the last few years, developers have taken up 10 times more projects compared to what they have done in their total lifetime,” says Anikipatti.

Where is the labour, brick and steel, cement? How will they manage all this? But there are construction companies who are trying to get more advanced technology for construction to match deliveries. However, the cost of adopting such technologies in India are still very high and not many developers are able to benefit from it.

The solution, it seems, lies in the urban development ministry’s plans to create a regulator for the real estate sector. The regulator would promote best practices and consumer interest.

“Where there is a delay, the regulator will ensure that penalty is paid by the developer. It will also be an ombudsman between the buyers and developers,” says Puri.