Track2Realty view on project delays
The lack of regulations is the root cause of project delays where the absence of any entry barrier, unlike many other financial institutions, is making anybody enter the sector with no track record or proven credentials of project execution. Many of the delayed projects are due to the entry of new players in real estate arena. Industry analysts believe opportunists who joined real estate business when the market was buoyant, are suffering the most.
Many developers, who started their projects when realty market was booming, lost their way once the inevitable reality of slowdown came ahead. As these new entrants lacked resources to build large size projects, they started failing to maintain their cash flows in the wake of slowdown. Due to their lack of credentials, both credit reliability and credibility, the bankers also did not extend funding to them. So, most of these new realtors are either trying to sell their projects to reputed developers or manage funds instead of completing their projects. Thus, their projects are getting delayed.
Beyond the execution capabilities also lies the fact that there are various reasons of delay ranging from funding issues to delay in regulatory approvals and weakening demand. Lack of funds due to slowing investor activity has been one of the main reasons of late for delay in residential and commercial projects. But the most significant reason remains lack of demand. The main reason for lack of demand is recessionary and inflationary pressures.
Increase in input costs is yet another contributing factor in delay of projects. Increasing input costs have decreased the margins of developers drastically. This is affecting the profitability of many ongoing and yet to be started projects, which are getting delayed.
According to a government-commissioned study on projects facing cost over-runs worth lakhs of crores, an acute skill shortageÂ is as responsible for the inordinate delays in big-ticketÂ real estate & infrastructure projects as cumbersome red tape and tardy land acquisition. A staggering 80 per cent of the developers are unable to find skilled project managers and blue-collar workers to execute projects on the ground, the study submitted to the Ministry of Statistics and Programme Implementation in July 2013 reveals.
The study has thrown up a surprise. It says, âthough some projects are delayed by external factors such asÂ land acquisition or regulatory approvals which are beyond the control of the executing agency, a majority of projects are delayed by factors that can be controlled at the project level through proper planning and project management.â
The analysis is as much true for infrastructure projects as for real estate projects. âIndia needs 4 lakh new qualified project managers every year till 2022, and a radical overhaul of the vocational education system to achieve its infrastructure dreams,â notes the study that has now been shared with all core sector ministries and the Planning Commission.
It is not easy for buyers to do risk assessment and analysis to avoid risk of getting locked in a delayed project. This is because it has been observed that the builder who looks likely to offer possession on time with the project having necessary approvals along with funding from a bank has also delayed for above mentioned reasons. Several projects boast of 100 per cent funding from foreign private equities and other investors, which theoretically means delays are less likely for lack of funds. In practice, it does not happen so.
Having said this, the projects are also getting delayed due to decrease in inflow of Foreign Direct Investment (FDI) after 2009. After 2005, when government allowed FDI in realty sector, the FDI inflow in the sector increased steeply. In 2003-04, share of realty sector in total FDI inflow was 4.5 per cent which increased to 10.6 per cent in 2004-05 and 16 per cent in 2005-06. But post economic slowdown in 2009, fall in FDI inflow contributed to delays in completion of large number of projects.
Fund raising in the domestic market is equally challenging and with banks tightening credit conditions for the real estate sector, developers are forced to borrow from NBFCs at 16-18 per cent interest and from PE funds at rates between 20-24 per cent, all contributing to project delay. As per rough estimates, interest rate from private sahukaars (money lenders) can range anything above 32 per cent, often making the project unviable for developers.
Another small but significant reason affecting funding is increase of minimum investment limit in PE funds to Rs.1 crore by Securities and Exchange Board of India (SEBI). Many small investors are finding it difficult to raise such a hefty amount. This is adversely effecting investment through PE funds.
So, the delay in projects is not just due to one factor but a combination of issuing affecting the entire ecosystem of the business. Of course, project clearance on part of government agencies is a challenge in the absence of a transparent and seamless system, but the delay is also an offshoot of problems like funding, weakening of demand and increase in input costs. These issues can be addressed partly by legislative reforms and then by financial reforms that could lead to regaining investor confidence, increasing FDI inflow and inducing demand.