Economic Slowdown & Rising Cost of Living: Rising defaults by Short - Term Real Estate Investors..

Short-term real estate investors, a source of quick funds for housing projects, are increasingly defaulting on payment to developers, as economic slowdown & rising cost of living keeps regular housebuyers on the fringes, narrowing exit routes for speculators.

A large number of such investors -  who generally buy multiple properties &  sell them in 6 to 8 months for quick gains are approaching developers for refunds, and in some cases even taking them to court, according to many real estate consultants.

Mr.Navin Raheja, President, National Real Estate Developers' Council, said, "The number of defaults by short - term investors has gone up in recent months"

India's property market has slowed over the past few quarters. The slump is more pronounced in its housing segment, where developers / promoters are offering discounts to push sales.

In the resale market, homebuyers are ready to wait it out. This has not just raised inventory and pinned down prices, but also shrunk the pool of buyers that short - term investors target.

"A developer's cash flow goes for a toss when investors do not pay up," said Mr. Samarjit Singh, Managing Director,  IndiaHomes, a property broking firm. "Cancelling a booking is the worst option for a developer."

According to property consultants, short-term investors have cornered 50 % to 60 % of newly built houses on the Dwarka-Manesar Expressway in Gurgaon &  about a third of houses coming up in Noida-Greater Noida Expressway. The equation would be similar for the different suburbs of Mumbai, they said.

While some speculators managed to exit these properties before the slowdown set in, a large number of them are still stuck for want of buyers. Many over-leveraged investors who had picked up properties in the last one year are now willing to offload apartments at handsome discounts, sometimes even going up to 30 %.

While the discounts are a big attraction, the sentiment in the property market because of the higher inflation, jobs cuts, increasing interest rates and an environment of massive uncertainty all around is pushing end-users to stay away from the real estate market.

Real estate speculators generally pay 20 % to 30 % of an apartment's value over nearly 6 months. When the housing project developer increases prices, these short-term investors sell their flats to either other investors or end-users at a profit.

Mr. Santhosh Kumar, Chief Executive Officer (Operations), Jones Lang LaSalle India said, "These were the investors who would bring in the much needed liquidity for the developer at the beginning of a project"

According to a Noida-based broker who did not wish to be named, developers generally use such investors to increase prices.

"Many developers would offer special rates to them for coming in early, sometimes even before all approvals for a project are in place. The investor was happy because he entered the project at a much lower price than a regular buyer and exited with a good profit," the broker said.

In view of the situation, some developers / promoters are keeping short - term investors out of their newly launched projects.

"They are weeding out such investors by running personal wealth checks on potential investor & asking them for their bank statements before selling houses," said Abhay Khemka of Khemka Investments and Properties in Gurgaon. "They are also asking brokers to do tougher due diligence before bringing in investors."

Src: ET

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