NCR brokers do a realty ‘check’ again

NCR brokers do a realty ‘check’ again
The Economic Times, August 24, 2009, Page 1 & 14

If Price Bets Backfire, Recovery To Be Hit

Sanjeev Choudhary NEW DELHI

THE broker-builder nexus that propelled property prices to unreasonable levels to beguile home buyers in the National Capital Region (NCR) during the realty boom of 2006 and 2007 seems to be back in action.

Brokers are increasingly underwriting properties in new projects being launched by developers—blocking a large number of apartments during so-called soft-launches, hoping to offload them at a premium to end-buyers after the formal launch.

This will help builders claim huge sales immediately and create an artificial scarcity in the market. But if brokers fail to offload the stock to end-users or long-term investors, property prices may take a beating and the nascent recovery in the residential market may be hit.

“End-users are back in the market and we think we will be able to sell the properties we underwrite,” a property dealer in Noida said, claiming he has underwritten several apartments in new projects launched in the area. “Given the interest among home buyers, prices will soon start rising and we can easily extract a premium,” he said, requesting anonymity fearing an exposure could spoil his relationship with builders.

The Indian economy, which expanded by a creditable 6.7% in the financial year ended March 2009 despite a global economic downturn, seems to be encouraging speculators in the property market.

Property prices had fallen around 25% in the past one year in Gurgaon, Noida and Faridabad. Some analysts had anticipated a further correction in prices this year with a large number of property firms announcing launches after a gap of almost two years. The combination of builders and brokers have now managed to keep prices steady despite a huge increase in supply.

New properties in Gurgaon are being offered at around Rs 3,600 per sq ft while in Noida and Faridabad, prices are hovering around Rs 2,925/sq ft and Rs 2,250/sq ft, respectively.

Brokers usually charge a commission from developers, generally 3-4% of the value of the property. But during the boom, several brokers started underwriting properties slated for launch with the backing of a bunch of investors.

The problem started arising when the property market went into a deep downturn and these broker-underwriters were left with huge unsold stock.

Brokers active again

IN MOST cases, brokers managed to dump the unsold stock back on developers, as they had paid hardly 5-10% of the total property value.

With the property slump seemingly close to its end now, brokers have again become active and started underwriting projects. Several developers, including Unitech, Jaiprakash Associates, BPTP, Emaar-MGF and The 3C Company, claim they have been able to sell thousands of apartments since April.

It’s impossible to verify these claims because these companies are either privately-held or don’t give out quarterly balance sheets. Also, since realty companies follow a percentage of completion method (POCM) for accounting, the revenue from sale of new launches starts getting recognised only after a quarter or two. Under POCM, sales are recognised as per the pace of execution and are first shown in books only after 30% of the project is complete.

Unitech, which claims to have sold 3,500 units since April in Gurgaon and Noida, said it is doing brisk sales through its own sales network as well. “There is nothing wrong in using brokers as they are an established channel for sales,” said Unitech’s head of corporate planning, R Nagraju, adding that brokers have not been underwriting their projects and a vast majority of its buyers are end-users.

The 3C Company, another property firm that has launched a project in Noida, claims to have sold 1,100 units in just a month—‘all to endusers’. “Not a single flat in our project has been underwritten by any broker. The moment you do it (get brokers to underwrite), they (brokers) go and sell it to investors. Other developers are doing it, but not us,” said Brijesh Bhanote, the company’s senior vice-president (marketing).

The developers’ claims too are hard to believe. “We still estimate there are unsold stock with developers who claim their projects have been sold out,” said Anshul Jain, India CEO of international consultancy DTZ.

A combination of end-users, investors as well as broker-underwriters are driving the market at present. When the market anticipates prices to go up, more investors and underwriters will enter, which is what is happening now. That is also the reason why underwriting at present is limited to low-priced projects. Brokers are part of all property markets, but developers’ dependence on brokers in the NCR seems to be much higher.

“Traditionally, brokers have played a very strong role in the NCR,” Knight Frank India chairman Pranay Vakil said. Developers have been forced to deal with brokers in the NCR as they would otherwise ‘bad-mouth’ projects, hampering sales, said a top executive of a NCR-based listed real estate firm had earlier said.