Project Delays, Project Deviations & Other Customer Woes...
by Mr. Anuj Puri, Chairman &
Country Head, JLL India
Reams of newsprint
have been dedicated to discussing the sufferings of consumers in the Indian
real estate sector. Particularly, homebuyers’ woes related to late delivery of
projects, deviation of housing projects from promised quality, additional
payments due to change in apartment area and inadequate protection of their
rights have been well-documented.
The question that
invariably arises is whether the developer is at fault, or whether larger
market forces beyond the control of developers are at play.
Construction Delays – By
Developer Or By Approval Authority?
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| Anuj Puri, Chairman & Country Head, JLL India |
Technically speaking,
the time consumed in obtaining all approvals adds to the total time expended in
completing the project. Any approval which is needed between the launch to the
actual start of construction up till handover of the apartments to the buyer
will be an additional time factor. Delays here will cause cascading delays in
delivering the project as per the promised time.
Before a project is
officially launched in the market and offered to buyers, there are myriad
approvals that a developer needs to obtain from the state and central agencies
and ministries. In any business, the longer raw material is held, the higher is
the holding cost – which, in addition to interest costs in case of borrowed
funds, causes an increase in the overall price of the finished product.
This analogy, when
extrapolated to the real estate sector, considers land as the basic raw
material for real estate development, with construction materials being the variable
costs. The longer a developer has to hold his land without getting any receipts
through the sale of proposed apartments, the higher his project costs escalate.
This can, in fact, be
a very costly proposition all around. In the current scenario, obtaining the
57-odd permissions to begin construction of a project can take as much as two
years. During this time, the cost of acquisition or even just holding the land
for a project rises. Builders already have to cover external and internal
development charges, license costs and often charges for change of land use
from various departments, which have also risen. Cost of construction has gone
up by more than 50%, as well.
However, this is only
one side of the picture. Many developers intentionally undertake a slower pace
of construction if sales in their project are sluggish or a larger part of the
project is unsold. They may have diverted a sizeable chunk of the revenue
generated from pre-launch sales to another project, or utilized it to pay off a
pressing bank debt. At other times, the authorities can be blamed for not
granting timely projects approvals.
Project Quality And
Deviations
A major concern has
been the difference in the promised quality and actual delivery status of the
apartment, which remains a concern for real estate buyers. A change in the
apartment area after buying from the developer can occur if a change in project
plan is necessitated due to a design or approval issue. A deviation of up to
10% is usually acceptable – for a higher deviation, a customer must definitely
seek legal recourse. That said, project deviations can also happen because of
structural deficiencies of the overall system, wherein rules are being made by
the governing authorities in a reactive manner rather than on a proactive
basis.
There are readily
recallable examples of how abrupt changes in regulations governing real estate
development can work against both developers and buyers. The revisions made in
the DCR regulations in the Mumbai Metropolitan Region a couple of years ago
caught the industry unawares, and added to development costs by about 15%. This
included the fungible premium payable if the builder opted to take the
additional 35% FSI option. These cumulatively accounted for a 20% hike in
construction cost. This move has led to an increased pressure on the
developers’ margin - which, in turn, resulted in price increases across most
projects in MMR.
The fact that
developers had to re-work their project specifications (upcoming as well as
on-going unapproved projects) resulted in significant project delays. The
result was an exacerbation of the cash-crunch on developers, and an outcry from
their buyers.
This is not to say
that developers do not tamper with overall project quality or make arbitrary
changes in their project designs with a clear intent to maximize profit. By
pinching off space from designated open spaces, children’s play areas, compound
perimeters and guest parking areas in an originally approved plan, an
unscrupulous developer can make a limited plot yield more saleable
space.
Recourse For Consumers
Regardless of what
causes delays or abrupt changes in project blueprints, consumers must be able
to get justice. Many examples of customers obtaining favourable decisions upon
approaching consumer courts exist, and the power of these forums should not be
under-estimated. However, the larger and less wholesome truth is that the
current legal dispensation is ill-equipped and under-regulated to offer
complete consumers protection in matters related to real estate.
The Real Estate
Regulation and Development Bill - long languishing on the policy drawing board
and still under consideration by the government – was intended to offer vastly
enhanced protection to buyers. However, after the most recent revisions to
RERA, it seems that it will in fact now be less protective towards buyers.
While the bill aimed at providing an alternate redressal mechanism, the new
provisions are talking of no recourse to other consumer forums. This can, in
fact, lead to pressure on this regulatory body in terms of an increased log of
cases, though it will reduce instances of multiplicity of suits.
Consumers should be
aware that a certain degree of due diligence and awareness about their rights
can protect them against unscrupulous practices by developers. In the first
place, due attention should be paid at the time of drafting the sale agreement.
A property buyer should fully understand the contents, if necessary with the
help of a lawyer, and make a clear note of what the developer has agreed to
deliver.
Developer’s sales team
will usually present a buyer with a readymade agreement format, and a buyer
must ensure that this captures every relevant detail. If it does not, the buyer
is fully entitled to ask for missing details to be included, and potential grey
areas to be clarified. A copy of the final agreement must be retained under any
circumstances, as this will serve as the primary evidence in a legal action
filed for agreement violations.
