Tag Archives: Underwriters in real estate

Why developers prefer investors as project riders?

Posted on by Track2Realty
Track2Realty Exclusive

Bottom Line: Developers prefer investors as project riders because the investors are least interested about timelines and quality.

Homebuyer, Home Finance, Indian property market, Indian housing reforms, Property market regulations, Real estate understanding, Real Estate tips, Real estate guide, Track2Media Research Pvt Ltd, Track2Realty, Homebuyers Knowledge, NRI Investors, NRI investment pattern“Today approvals can take anything but not less than one year. During that phase nobody is going to stand by you except the investor. Even the banks are not going to fund you. All the organized funding starts once you have something ready to offer to them. But you cannot keep waiting that once the project gets approved then only you will launch it; you need some quasi investment at each every level,” says a candid Sunny Bijlani, Director of Supreme Universal on the advantages of having an investor as project rider.

Not many developers would publicly admit it but the fact of the matter is that there are many advantages for the developers to have investors as project anchors. They are the one who bring to the table initial investment, often even without any collateral or receivable. The developers need investors to provide cash, to give them money even for land, and only the investor will give them money at that early stage.

There are two models that work in the real estate investment. Mostly it is a pure investors’ pre-launch with minimum amount of understanding as to what kind of a project it would be in future. The second kind of pre-launch is crowdfunding where there is little higher understanding.

In this case the developer has the plans of what would be the shape of the project but he does not have sanctions. He has the layouts ready, even floor plans and unit plans ready and he would go for crowdfunding. So, it is a mass pre-launch and not depending only for the select set of investors.

Though the law of the land does not allow this kind of opaque transactions but it is an open secret in the Indian property market today. It is often done in an IPO model when the entire city knows about it. The advantage of this IPO style pre-launch for the developers is that the price point here is higher than the price point at which they offer it to the select set of investors.

However, the developers have their own reasons to hail investors. Devang Trivedi, Managing Director of Progressive Group goes to the extent of calling the investor as more or less a gentleman. According to him, unlike end users the investors are not problematic to ask so many questions. Even if there are some escalation charges, it is easy to deal with one such gentleman than 15 or 20 other people who will keep fighting. He will understand it. So he is an easier person to deal with once he comes in.

“Whatever I am saying is unfortunate reality and you must give credit to the developers to weather so many variables and still he is delivering despite of all the odds. Everything is against him – court, ministry, municipality, local factors, environment and market forces. The fact is that investor remains an asset for the developer. It is not just about his entry that brings money to the table. But even when he exits in many cases he does not sell it to the end users but sells it back to the developer, who buys it at thousand odd rupees cheaper than the price at which developer will sell to the end user,” says Trivedi.

So, other than the fact that the investor brings first flush of money to the cash starved sector, what also suits the developers is the fact that the investor is not going to ask them so many questions, like whether the apartment is vastu friendly or where is the wind blowing.

They just want a certain number of flats; not even bothered about the floors etc. He is not questioning the carpet and built up area. He is an easy guy to deal with as opposed to an actual user who will ask uncomfortable questions and make their life miserable.

Moreover, once the investor has given in his money he is non-interfering. Whereas an actual user wants to visit the site every month and then he will seek explanation about the pace of construction and every other thing. But for the investors all that matters is that his money keeps growing and hence he has a win-win relationship with the developer.

By: Ravi Sinha

Beware! Your property’s price appreciation may not be real

Posted on by Track2Realty
Track2Realty Exclusive

Bottom Line: The practice of under-writing has created a peculiar scenario in many real estate markets, where there is an increase in capital values of property, despite a dearth of buyers in the resale market 

india realty news, india real estate news, real estate news india, realty news india, india property news, property news india, india news, property news, real estate news, India Property, Delhi NCR real estate, Mumbai Real EstateSo you are happy with the price appreciation of your property? Well, so long you are living in that apartment you continue to be so; not when you want to sell it off! Reason: re-sale market offer for the same appreciated property may give you a shock. Worse even, you see the developer advertising at a price point which no one in the secondary market is ready to offer.

Appreciation in property prices may not always mean good news for homebuyers in India. There is a cartel of builder-under writer nexus backed by uge amount of black money that is behind the artificial property appreciation in the market. 

In the property market these traders of artificial appreciation are known as under writers. These brokers/financiers who operate as under writers usually under write the projects.  The deal with the developer is normally that cases, henceforth they will control the marketing strategy and the price point. A builder, thus, offloads his stock to under-writers and the under-writer sells the stock to end-users or investors.

Based on the artificial demand created, the builder keeps on increasing prices and the under-writer then sells the property at a lower value than the builder’s price. The premium charged by the under-writer, is usually paid in cash by the buyers and this leads to a circle wherein, the unaccounted income/cash component/black money is flushed into the real estate market.

These under-writers make profits through the huge difference between the price of a project at its launch, and the artificially inflated price.

Average buyers, living under the illusion of property prices appreciating, fall prey to the ‘discounted’ prices (which is much higher than the launch price), offered by the brokers/under-writers, who make money through this channel. Gullible home seekers buy, under the impression that there will be a further increase in prices, whereas, actual end-users, who have booked at the time of launch, hardly find a market to exit at that level.

No rational explanation of economics can justify how property prices keep on moving up, despite a sluggish economy and demand. Various research agencies, in recent years, have reported about the amount of unsold stock, lying with developers and how it has increased, over the last quarter or year. While this lends credence to the exprectations of prices to fall, prices of residential properties in India, move only in one direction – up.

Abhay Kumar, CMD of Grih Pravesh Buildteck rather questions that if the appreciation is artificial then why are people investing more in property as against other investment instruments. According to him, builder-under writer nexus is a reality of the past and now the market is matured enough to understand the true growth potential.

“There was a time when the market was growing at a pace which could sustain the artificial appreciation. But not any more! Today the buyer understands the market reality and his investment ROI. So, a forced appreciation is just not possible,” says Abhay.

Nikhil Hawelia, MD of the Hawelia Group, believes that one should look at the secondary market, to ascertain the true credentials of a developer. “If my project is not attracting as much a premium as others in the neighbourhood, in the secondary market, then, I may have failed in my marketing strategy,” admits Hawelia.

It is not just the secondary market that indicates the real versus artificial appreciation in the housing market today. The difference between rental yields and capital values is also an indicator that the price point in most of the property markets across India is not realistic.

By: Ravi Sinha