Checklist to assess Real Estate Developer Credibility

We are currently witnessing a market scenario wherein inflation and interest rates will taper down even as the GDP growth rate picks up, and selective asset classes are becoming increasingly attractive for investment. International market dynamics suggests that gold and crude oil will continue to weaken, and commodities as an overall asset class will continue to display weakness because of easing inflation.

Accelerated industry momentum, improving GDP growth and a moderate tax regime normally results in an improved savings ratio in the economy. India's new Prime Minister Narendra Modi is proactively courting international industry players to invest in India. With strengthening diplomatic ties, both commercial and industrial growth is looking up; this will directly reflect in higher space absorption over the coming months.

Market pundits have already started begun to forecast 2015 as the best year in the current decade when it comes to real estate absorption. If we apply the thumb rule of every 100 square feet of absorbed commercial space yielding one new job to the net absorption of 40 million square feet of commercial space in 2015, it emerges that the coming year will see the generation of around 400,000 new jobs.

Considering this spurt in job creation in conjunction with the Government's 'homes for everyone' focus, absorption of residential units will improve dramatically in the coming months. The cities with maximum job creation - Bangalore, Gurgaon, Pune, Chennai and Hyderabad - will continue to dominate in terms of residential demand.

In this upbeat scenario, most property investors will hasten to determine the most promising pocket within these specific cities. While it is true that location is a key consideration for successful residential property investment, it is only part of the story. Given that the highest ROI is typically gained from early investment in under-construction projects, an equally important variable is the reliability of the involved developers.

Credibility Matters

Indian consumers are quite sophisticated when it comes to evaluating the brand value of most products they intend to buy. Despite the faith that leading brands inspire, consumers on the market for new mobile phones or cars will verify multiple details in terms of features, durability and service. Thanks to the internet, the days of struggle for pertinent information are finally over. An online search for details on any product will generally yield a generous amount of data on which to base eventual purchase decisions.

However, we do not see consumers engaging in this depth of research when it comes to real estate. This is a major concern, considering that real estate as a sector cannot boast of any real self-governance and does not yet have a regulatory body to govern transactions. Nevertheless, while investing in a real estate project, the developer's credibility is a very important concern.

Hype Or Real Opportunity?

In India, few other sectors see the kind of exuberant advertising and hard promotion that real estate does. Buyers are constantly falling prey to misleading promotions and schemes that are actually attractive only on paper. In fact, many developers in India have limited or no experience in real estate development at all. However, they manage to circumvent the alarm bells that should ring in any buyer's mind when confronted with a case of zero background and credibility by using glossy advertisements and the hard-sell tactics of unscrupulous property agents.

Given that a developer's credibility is as important - if not more important - than a jeweler's or a stock broker, guidelines on how to verify this vital factor is in order. A property buyer or investor should always check the following aspects before making a purchase decision:

Credibility Checklist

1. Market Credentials:

Over how many years has the developer been active in the real estate space, specifically in the development domain? This is an important yardstick to measure a player's overall experience, and is normally displayed on a developer's website. However, this figure should be cross-checked with a qualified consultant. Today, many developers tend to include their years as real estate brokers or construction contractors, which obviously do not count.

2. Financial Strength:

In today's real estate market scenario, most developers are grossly overleveraged. Investors must always gain a proper understanding of the true financial status:

· If a developer is a listed entity, the group's financials are in the public domain and should be checked to verify profitability and regularity of dividend pay-outs to stakeholders

· If a developer is not listed, the group's sister companies (which may or may not be actively related to the real estate business) should be listed. The financial performance of these companies can give a bird's eye view of the group's overall financial strength.

Buyers and investors can and must also verify whether a developer has defaulted for loan payments to banks or other financial institutions, both in a corporate and individual capacity. Banks categorically lists the names of such defaulters in the public domain, and a scan of this list is a critical tool for evaluation.

3. Past Delivery Track Record

A developer's claims about his project delivery capabilities as stated on his website should not be taken as Gospel Truth. Buyers and investors should necessarily extend their fact-finding beyond this and also go through various blogs and sites such as India Real Estate Forum, where home buyers discuss various topics - including developers' record of project delivery in the past.

A note of caution - these blogs and sites often capture multiple issues, and many are cluttered with conflicting information and opinions, which can lead to further confusion. A few key aspects to be validated are:

· Does the developer have a record of chronic project delivery delays? Allowances should be made for instances where projects were delayed because of circumstances such as delayed approvals

· Has the developer obtained Occupancy Certificates for his projects? Failure to do this is a completely unacceptable norm, and can be easily detected on relevant blogs and websites

· What has the overall customer experience been with regards to a developer's delivery of project?

· Do you find recurring complaints about the developer not providing the specifications which he assured buyers of at the time of booking at the actual time of delivery?

4. Capacity To Manage Multiple Projects:

Often, developers launch multiple projects and are consequently challenged to complete them all in time. The ability to launch and complete multiple projects as per scheduled timelines is the hallmark of seasoned professionalism, adequate capitalization and sharp customer orientation. Any evidence to the contrary is a danger signal. A developer's own execution team plays a pivotal role here. While a developer may appoint a reputed external contractor and make an announcement to this effect, this fact does not guarantee timely completion. In fact, it can become an argument of defence to explain why the delay in completion is not the developer's fault.

Regardless of external contractors, reputed and credible developers always have strong internal supervisory and execution teams which ensure that outsourced construction happens as per schedule. A developer's capabilities and overall approach on this front can and must be verified online as well as offline.

5. Project Approvals And Home Loan Availability

It is the responsibility of buyer to ask for copies of project approvals such as the Commencement Certificate. While home buyer without a technical background may not know what to ask for or be able to verify whether they are actually seeing the relevant documentation, those who are buying via a home loan are on safer ground. Prior to disbursement of a home loan, and bank or financial institution will take the necessary steps to ensure that all documentation is in place. As a rule of thumb, financial Institutions like SBI, HDFC and LIC Housing Finance are among the most rigid when it comes to clearing projects for home loans. Even if the buyer does not need a home loan for the full purchase amount, availing of a token home loan to ensure that all aspects are validated is a smart move.

6. Involvement Of Credible Partners Or Private Equity Firms

A good way for home buyers and investors to safeguard their interests while buying into a project is to ensure that the developer has a credible partner such as a real estate fund or private equity players. This effectively means that the partner has done full due diligence on the project, and bodes well in terms of its timely completion. It also rules out the possibility of diversion of funds raised on apartment bookings or borrowed for a specific project to other projects.

7. Corporate Governance And Family Disputes

A developer who is involved in family disputes, legal battles and corporate governance issues is a bad investment risk. Any court verdicts delivered against a developer in the past can impact his functioning and borrowing capability. Such developers should be completely avoided.

8. Alert: Buyback Guarantees And Assured Returns Offers

There is no free lunch in life. When a developer offers a buyback deal or assured returns to home buyers, it is a clear indication of financial stress driving a desperate marketing strategy. While such offers may look very attractive to buyers, the probability of their money getting stuck in the project is very high. Developers who make such offers should be strictly avoided.

9. Alert: Multiple Soft / Pre-Launches

When developers soft launch or pre-launch a project, they are basically raising money for the project before all the required approvals are obtained. In other words, they are raising capital against the project that is legally not supposed to be sold. Developers who habitually engage in soft launch and pre-launches have high probability of delaying the execution and possession of the project.

With absence of a real estate regulator in the country, neither real estate developers nor brokers are subject to the kind of strict governance seen in the insurance or banking sectors. Unfortunately, the industry also does not have entry barriers for becoming a developer or real estate broker; operatives without credibility or good track record enter the market at will and often take gullible home buyers for a ride. At a rough estimate, there are no more than 4-5 credible developers in any Indian city. Home buyers can identify these by following the above basic evaluation process, and thereby circumvent a lot of the hazards that finally result in delayed projects and blocked money.

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