Real estate offers lure some Indian buyers
For around a year, Girish Kale was flirting with the idea of buying his dream house. His budget of 3.5 million to 4 million rupees ($56,000-$64,000) wasn’t going to work for Mumbai, where the kind of house the auto industry professional wanted would cost upwards of 10 million rupees.
Kale, who currently lives in a rented flat in Kandivali suburb, turned instead to Pune, a university city 150 kilometres away, with a plan to opt for a so-called 80:20 payment scheme. Such schemes allow the buyer to pay 20 percent of the property’s cost initially and the remaining amount on possession after construction.
However, when the Reserve Bank of India issued a directive on Sept. 4 restricting some of these schemes, Kale’s broker put them on the back burner. The central bank’s directive might have disappointed buyers, but some still want to invest in property.
“Maybe when in six months I would like to get married … my expenses will go up. That is why I was interested in 80:20,” said Kale, who is still on the lookout for a similar offer that will fit his budget. “It will be difficult but still I will go for it. I want to invest in real estate … if I delay it for maybe one or two years further, the price will go up”.
In an 80:20 scheme, the buyer pays 20 percent of the total property value. As construction progressed on the property, the bank would pay the developer, which then would pay the equated monthly instalment or EMIs on the buyer’s behalf.
The RBI said it was concerned because in certain cases, the developer received the entire amount upfront from the lender, making it a non-construction-linked loan and exposing the buyer’s credit profile to higher risks in case the builder defaults.
India’s real estate sector is going through a rough patch, with higher living costs, rising interest rates and an economic slowdown weighing on consumer demand and hurting the largely unregulated sector since the 2008 financial crisis. As people shy away from buying property, developers continue to wrestle with high debt, construction costs and unsold inventory.
During the period from July to September, 57 million square feet of residential property was sold in six major Indian cities, as compared to 73 million square feet last year, a report from Mumbai-based real estate research firm Liases Foras showed.
But some such as Kale, who were eyeing schemes to ease their initial payment burden, are now looking for similar offers to buy their dream homes. In recent years, developers have offered everything from freebies such as cars and television sets to “subvention schemes”, which allow buyers to postpone their monthly interest payments for a fixed period, to lure investors.
Shashi Shailaj, who was considering a similar subvention offer for a flat in Panvel near Mumbai with an aim to avoid the double burden of paying rent and EMIs together, found a better deal.
“It would’ve been very helpful (the 80:20 scheme), but you need to continue to look for alternatives,” said Shailaj, who bought a house worth around 5 million rupees ($83,000) after his Bangalore builder offered him a discount of 200 rupees per square foot.
In a subvention scheme, an investor’s initial payout is reduced as he could opt for a home loan and pay around 1 million rupees to buy property worth over 5 million rupees. Simultaneously, the builder pays pre-EMI interest on behalf of the buyer, helping the company secure funding at home loan rates instead of costlier construction loan rates.
In case the builder defaults on the payment of these monthly EMIs, the buyer’s credit score — used to assess creditworthiness — will be hit as the loan is in the latter’s name. But the RBI’s directive to curb schemes where such loans were not construction linked is seen as a good step by experts such as Ashutosh Limaye, head of research for property consultant Jones Lang LaSalle.
“RBI is definitely trying to protect the buyer’s interest,” said Limaye. “There’ll be disappointment … but I think buyers will also eventually realise that this was helpful to overall put order to the industry”.
After the RBI’s directive, many developers have stopped offering the 80:20 schemes, research firm Liases Foras said in a separate report.
(Editing by Aditya Kalra and Robert MacMillan; Follow Anupriya on Twitter @anupriyakumar, Aditya @adityayk and Robert @bobbymacReports. This article is website-exclusive and cannot be reproduced without permission)