Delhi NCR - a Real Estate Landmine

What should real estate buyers be wary of in the ongoing NCR bull market?

Real estate in National Capital Region (NCR) is back in everyday news. There are news reports mentioning how real estate prices – both land and apartments - have gone up between 30-60% in the last year and a half, post pandemic. There have been exciting pockets of real estate appreciation specifically in the emerging areas of Golf Course Extension in Gurgaon and along the Dwarka Expressway. The Noida airport work is being expedited and could be a new fillip to the Noida and Greater Noida markets which were typically considered sub-ordinate to the glitzy Gurugram.

This has been a tremendous turnaround for the Delhi-NCR where real estate has been struggling since 2014 – a long brutal phase of capital value de-growth catalyzed by episodes of demonetization and establishment of a regulator (RERA). Many of us were pushed to liquidate our properties at a hefty loss of 20-30% in the peak of the market crash between 2016-18.

If you are invested in NCR real estate already, this is a period of great relief for you after a long lull in the market. That said, for new investors or new investments amidst this euphoria, there needs to be a conscious effort not to forget some old lessons learnt in the previous cycle.

All of us would concur that Delhi-NCR is the most notorious real estate market amidst the major Indian cities. Yes, cities like Greater Mumbai and Hyderabad have their own challenges but no market comes close to the volatility and uncertainty that NCR seems to have come known for over the years.

Let’s look some of the key factors that make this the most treacherous real estate market in the country and how as investors we can avoid committing similar mistakes as those in the last real estate upcycle did.

Speculative market – Hangover from the 2000’s bull market

It is no doubt real estate in general is marketed and bought as a speculative investment asset. But this trend is all the more glaring in the Delhi-NCR market.

It is critical as a buyer to always distinguish product-based and offer-based marketing from developers. Credible developers who have the intent to build and safeguard their brand, deliver the development on time typically sell how the project is great to live in and elevates your quality of life. When you see a project solely marketed on ‘special pre-launch’ with too-good-to-be-true offers, you need to understand the developer is targeting speculative investors. He might or might not have the intent or ability towards timely completion of project. He wants the Greater Fool theory to set in motion. I recently saw a real estate marketing campaign which advertised 18% rental yields! Essentially the developer is selling the speculative dream that you recover your capital purchase value only from 6 years of rental income and on top of it earn bonus capital appreciation. Ask yourself as a buyer how such schemes make practical sense.

Under-writing inventory to brokers

Another massive trend originally conceived by ingenuous builders in NCR is Underwriting - selling large chunks of their apartment inventory to brokers at a bulk discount followed by the brokers selling to buyers like us. The broker buys the original inventory priced at 100 Rs. At close to 90 in one go and tries to sell it to you at any price between 95 and 100. Typically by showing you a list price of 110 and offering a ‘mouth-watering’ and ‘once-in-a-lifetime’ discount of 10-15%. This practice further enhances speculative behaviour as the broker now saddled with inventory is free to market the property the way he wants without any care for mis-selling or incorrect commitments about the project. RERA tries to protect the buyer for any mis-communication by broker but unfortunately most mis-commitments happen verbally and as a buyer you don’t stand a chance in the court of law.

Incidence of serial frauds in NCR

Not a week goes by when you read the newspapers and you do not find a NCR based developer featured for some scam, violation of norms or insolvency. Corporate governance in the NCR real estate ecosystem seems to be a joke. It cannot be a co-incidence that the largest scams impacting consumers and lenders alike often end up happening predominantly in one region. It is not an issue of one or two unscrupulous entities, it is the ecosystem that does not penalize these acts enough to ensure another new promoter does not commit the same thuggery. The unfortunate piece is how a respected, supposedly infallible brand can still succumb to utter shock of buyers and investors. Remember how infallible a brand and a stock market darling was Unitech in the previous real estate bull market?

So what do you as a buyer to safeguard yourself from such entities and promoters?

1.       Look beyond the marketing, sales offers and hype created by brokers. Go and personally visit delivered projects of these developers. Ask them how many projects have they delivered in the past and how much have they delivered on time. Never ever buy something going by the pressure created on offer expiry. Better to pay 2 lakhs more rather than losing or getting stranded with the whole one crore.

2.       Look up on their financial position. This is a tricky one since very few developers are listed and financial information readily available. One can start small with a simple Google search about the credit rating of the developer or their borrowing costs. Developers who borrow significantly higher than prevalent base lending benchmark rates of banks signal presence of key risks that have already been identified by the bank’s credit teams.  

3.       Stick to resale purchases of ready projects. Simplest and time tested way to buy real estate and ensures peace of mind, since you can even check on delivery quality issues.

4.       Buy from large listed developers whose reputation is too large for them to default on their commitment. This does not offer any guarantee as there could be another Unitech but at least lowers your probability of a Jaypee playing out.

Media hype to create FOMO

An interesting trend observed in the real estate Disneyland of NCR is how all developers, small or large rely on smart PR strategies to build hype in the market about their projects. NCR is the only region where you will read articles about how a lesser known builder sells 500 Crores of homes in one day or even a ‘few hours from launch’. Similar articles are also published by brokers claiming how they sell thousands of crores of real estate every year.

A key fact to understand is all these press articles are bought. The media houses do not care one bit about the veracity of the sales data nor does anyone question the builders if these data are audited. More often that not, these sales data are a result of under-writing huge chunks of inventory to brokers and recorded as sold inventory by the builder in their books. The builder then issues a press release on the phenomenal success of the project which then subsequently helps the broker unload the stock riding on the hype.

As a buyer, the hundreds and thousands of crores sold should not matter to you. Prioritize your due diligence, ensure you are investing in a credible developer having verified his delivery track record, don’t hurry buying for mouth-watering discounts. The golden rule is more the urgency the builder tries to create, the more cautious you need to be and take your time in evaluating facts. Try to avoid FOMO, there is a lot of land available in NCR in aggregate and there would be more launches that would come your way 😊

Different regulatory systems in different cities

Delhi NCR real estate suffers from an unfortunate scenario of falling under governing jurisdictions of three different states. What this means is that developers have to work with different regulatory authorities with different applicable norms in the different markets of Delhi, Gurgaon, Noida, Faridabad and Ghaziabad. This also gives rise to limited choice of developers in some markets as the incumbent developers with strong political ties in a specific market prevent large-scale entry of better developers to protect market share.  

Lack of good quality listed developers and unscrupulous practices by brokers

There are a handful of large listed or national level developers operating in the Delhi-NCR market. Unfortunately the large presence of unscrupulous entities that has driven the ecosystem and the shady way the market operates has made the reputed developers wary of entering the market. The local builders roll out glitzy events for their brokers to pamper them with heavy commissions in selling their projects. Unfortunately, your ‘trusted broker’ could be selling you something only because he earns a 6-10% commission on your purchase without any check on potential red flags at project or developer level.

Delhi-NCR is the only market in India, where brokers are paid significantly above the country-wide averages of 2-3% and where the brokers in turn have accustomed the buyers to kick-backs. Essentially, you pay 100 rupees for the property, the builder pays the broker 7 rupees as commission and the broker gives you back 5 or 6 rupees as a kick-back. The builder does not have the guts to sell to you at the actual price of 95 because the brokers control the market and the builders (most lacking credibility) have resigned to this operating model for the fear of no patronage by the brokers. Now the kickback offered to you by brokers depends on your bargaining ability.

This practice of making brokers dictate the success of projects is a fall-out of short-termism and fly-by-night builders who were happy to get the inventory off their books. Of course, there are credible brokers out there in the market who work with ethics but prioritize your needs but the sheer majority of the unscrupulous kind makes it difficult for you to identify the right brokers to work with.

Apart from national level players like Godrej and Mahindra, reputed regional players like Sobha had entered the market in the last few years. Oberoi from Mumbai and Prestige from Bangalore are expected to enter the market soon. Hopefully the entry of these reputed developers sets a healthy tone of competition and buyers can see a gradual change in the way the ecosystem operates.

Delhi-NCR has been that kind of a market where the real estate promoters out of sheer greed or over-optimism stretch themselves too thin during a bull phase (such as the current one) and make their buyers and lenders pay for their mistakes during a downturn. Though this euphoric phase might be too early to mention a downturn, considering real estate is a long gestation investment, one needs to separate the wheat from the chaff in the good times to avoid being a sudden victim of a real estate scam or insolvency like thousands of buyers in Gurgaon and Noida find themselves in today. You never know which of the ‘all is well’ developers today is tomorrow’s Ireo or Jaypee.

In Summary, it is wise not to get carried away by too-good-to-be-true offers or media articles creating hype about runway success of projects in Delhi NCR. It is better to stick to larger developers who have a long-standing reputation to keep and pay that price premium. It is even better to wait and purchase the plot/apartment on completion of project to avoid any hidden surprises on financial position of the developer.