A real estate project goes through a series of time consuming processes before it gets ready for possession. It is important to know the nuances of each step to understand what goes into completing a real estate project and the reasons for delays:
1. Identifying the land – Land is the most important and expensive raw material in a real estate project. Developers either buy the land or does Joint Development Agreement with the landowners. The latter option is quite common in southern markets especially Bangalore. Northern markets such as Gurgaon & Noida has primarily land acquisition model as the land is owned & auctioned by the state governments.
2. Due-diligence of land – Getting a clean property title is extremely difficult in India. Reputed developers spend a lot of money & time in filtering out clear properties. In case of owned land or those auctioned by the state agencies the title is much cleaner than those owned by private landowners. The unavailability of Title Insurance in India exposes builders and owners of land to huge risks.
3. Designing the master plan and / or building plan – Master plan is the project layout plan which specifies the number of towers, total built-up area, number of units, internal roads, % of green cover etc in the project. Building plan is the internal drawing of towers, blocks & individual units.
Interestingly most of builders start selling units in the project once the tentative plans are ready. This is termed as “Pre launch”. Buyers who invest at this stage usually take high risk as the project is not approved yet, however they get 5% to 10% discount on the proposed launch price. With Real Estate Act 2016 the Pre-launch scheme is going to end.
4. Applying for project related NOCs & approvals – This is the most time consuming & frustrating step for any builder. A typical real estate project might require anywhere between 10 and 100 NOCs depending upon the city and might take anywhere between 1 year and 3 years. Mumbai is the worst place to get building NOCs. Typical NOCs required are from Fire department, Airport Authority for height clearance, Electricity Board, Water & Sanitation Boards, Environmental Clearance (MOEF) and Pollution Control Board. Imagine the agony to wait up to 3 long years to launch the project from the date of land acquisition!
5. Identifying contractors & vendors – Once the approvals are in place developers start short-listing contractors for construction and vendors for materials purchase.
6. Construction – Once the contractors are finalized construction activities start. Usually it take up to 4 years to complete a large size group housing high-rise project of 1 million sq ft. For low rise project this can be reduced by 6 to 12 months.
7. Post completion formalities – Once the project is ready for possession developer applies for Occupancy Certificate which is required to occupy the premises in some cities which might take up to 6 months. Assuming no or minimal deviation Bangalore usually has a 3 months window.
Let us now understand reasons that cause delays in a real estate project. For more clarity I have bucketed them in two major categories A & B as listed below:
A. Pre-launch / Pre-approval delays
1. Approvals related – Usually it takes anywhere between 1 and 3 years to get approvals. However sudden unexpected orders or changes by govt. bodies such as recent NGT order can delay the entire approval process. So it makes sense to avoid PRe-Launch schemes and invest only in a fully approved project.
2. Change in project layout & building designs – Changes in FAR or some other orders from planning authorities or courts might force builders to alter their master plan or building plan. Recent NGT order is a perfect example. Sometimes builders intentionally delay at this stage if there is any positive change in FAR so that they can build more on the same piece of land by revising their plans.
B. Post-launch / Post-approval delays
1. Approvals related – In case of large developments developers usually divide their project in phases. This may expose the project to any changes in building planning rules or court orders in future. Most of the rules changes or orders are prospective in nature and hence affects unapproved portion of the project. It hurts builders as much as it hurts average buyers.
2. Change in FSI during construction – There have been many instances where builders have intentionally delayed the project expecting higher FAR from the planning authorities. FAR decide how much one can build on a given piece of land. Higher FAR means more area to sell and hence more revenues. Usually builders add more floors to the existing towers to consume extra FAR. This leads to problems with existing buyers as they may not agree with additional floors or higher density of people within the same society. Usually people end up going to courts as have been evident in so many cases in NCR.
3. Funds Diversion – Builders utilize (divert in some lingo) a portion of customer monies for corporate as well as personal expenses such as buying new lands, for other ongoing projects, expensive cars for managements & promoters. This is the root cause of delays in most of the projects across India. My next post shall cover this in detail.
4. Slow sales – Sometimes poor economy might contribute to delays as well. As sales slows down builders try to slow down the pace of construction to match the cash flows requirements. This strategy can end up in a catch-22 situation as slower pace of construction can lead to lower collection and lower sales. Usually the worst affected is multi tower high rise residential projects because builders might want to delay few towers to match the pace of construction with sales. However they would have booked sales in all these towers leading to agonizing wait for the buyers.
5. Litigation: Land Title is not 100% perfect in India. Lot of times frivolous cases are lodged by third parties or PILs are filed to extract monies from builders who have become quite venerable in recent years. Sometimes family members of landowners start fighting among each other while sometimes landowners might get greedy and sue builders to renegotiate JD numbers seeing a higher realization of sales price. However the entire blame come on the shoulders of builders who may not be at fault here.
6. Deviation: also known as “loading”. Some builders, reputed as well as lesser one, do it all the time. They build more than what was approved by the authorities. Deviation varies from 10% (in southern markets) to 50% in NCR & Mumbai regions. Recent example was Supertech Omicron project in Greater Noida where buyers are fighting Supertech in court. Erring builders must be heavily penalised for such gross violation of laws.
As we can see there are several nuances involved in the construction business at every step and not all are created or caused by builders. While everybody loves to loathe real estate builders, however very few appreciate the amount of hard work & stress involved in conceptualizing & developing a project in this country. While builders must be punished for deliberate delays in the projects they should also be protected from reasons not attributable to them as discussed above. Hopefully Real Estate Bill 2016 brings about the required transparency in the real estate ecosystem for the benefits of everyone.