Dreams Deferred

How the developer stood between the buyer and the house
Dreams Deferred
Ghost Town
Jaypee group’s ­unoccupied Wish Town in Noida
Photograph by Tribhuvan Tiwari
Dreams Deferred
outlookindia.com
2017-10-07T10:19:03+0530

‘Do you want possession of the booked flat or refund of money?’ That’s the choice offered to hundreds of harried home buyers in Super­tech’s 40-storey towers in Emerald Court in Noida and Uni­tech’s 61 projects in Gurgaon and Noida. Follow­ing Supreme Court ­orders, they have been asked to ­indicate their preference on websites created for the purpose. The court will get to know the preferences later in October.

A growing number of developers such as Supertech, Unitech, Jaypee, Amrapali and Parasvnath are facing varied charges in consumer forums and courts. The issues range from non-­delivery of paid-for houses to quality of construction, missing facilities and violation of regulations. Topping it, insolvency proceedings are being initiated against Amrapali’s Silicon City in Noida, though the Supreme Court has stalled similar proceedings against Jaypee to protect home buyers’ interests. It’s a sea change from the scenario a little over a decade ago, when most of these companies began charting spectacular growth. Due to mismanagement of funds or diversion of money from one project to another, many ­developers are sitting on piles of ­unfinished housing units, particularly in the NCR region.

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Jaypee group, a diversified Rs 20,000 crore “infrastructural industrial conglomerate”, is one such developer. Having diversified from power and ­cement to real estate business in 2000 with a golf course themed project in Noida, the company took a leap in 2003 on bagging the contract for the 165.5 km Noida-Agra Yamuna Expressway project. The contract to Jaiprakash Ass­ociates Ltd (JAL) came with 6,175 acres of land to build five integrated townships. To execute the project, JAL set up a special purpose vehicle Jaypee Inf­ratech Ltd (JIL).

The company launched its most ambitious integrated township project in Noida called Wish Town in 2007, and two more residential projects by July 2009. By October 2009, it had sold 88 per cent of the units. All were expected to be completed by 2012, but that did not happen. Rajendra Gupta of RKG Law Associates attributes the delay in part to JIL’s focus on the expressway. According to the Yamuna Expressway Authority, costs escalated from the estimated Rs 5,183 crore to around Rs 13,000 crore eventually.

In 2010, JIL went in for an IPO (initial public offer) to meet its project commitments. Based on JIL’s audited financial statements, Gupta says the company collected over Rs 20,797 crore from home buyers until 2015-16 in addition to other inc­ome, going by interest paid to banks on a term loan of Rs 6,328.60 crore, Rs 1,156 crore tax on presumptive profits from real estate activities, dividend of Rs 451 crore to shareholders, dividend tax of Rs 75 crore to the Centre, besides the amount set aside for corporate social responsibility, remuneration to the promoter, directors and their relatives, investment of Rs 427.50 crore in Jaypee Hospital, among others. The company also utilised Rs 15,000 crore for purchase of land and construction of flats. “About 950 acres bought for Rs 15,000 crore was mortgaged by JIL as collateral for a Rs 33,000 crore loan,” says Gupta, pointing out that while JAL invested in JIL’s equity, JIL provided its assets as collateral for the JAL loan.

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JIL’s audited annual reports also rev­eal that from August 10, 2012, to March 31, 2016, the total toll collection from the expressway was about Rs 590 crore, or around Rs 165 crore per annum—insufficient to cover the interest burden of over Rs 1,000 crore per annum on JIL’s term loan from an IDBI-led consortium.

“This negative inflow in JIL has res­ulted in delay of more than four or five years in delivering the home projects,” says Gupta. With Rs 3,900 crore owed to it, IDBI seeks to initiate insolvency proceedings against Jaypee Infratech, which is not expected to impact other group companies.

In Unitech’s case, two of its directors are in police custody following cha­rges of fraud by home buyers who inv­ested in the company’s projects in Gurgaon and Noida. Unitech owes a total of over Rs 7,800 crore to 16,300 home buyers in 61 projects, according to information collected by Supreme Court amicus curiae Pawanshree Aga­rwal. There has been little progress on Unitech projects since 2012. The Eco­nomic Offences Wing has found evi­dence of funds ­diverted to different companies and individuals, and is awa­iting the court’s ­direction before proceeding further, sources reveal.

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On its website, Amrapali boasts of having around 30 real estate projects in hand, apart from commercial and IT parks in the pipeline. It has also made a foray into films and television content. “Where the money collected from home buyers was diverted is a mystery as their balance sheet is vague on that and the directors are elusive,” says R.K. Sri­v­a­stava, president of Amrapali Sapphire Phase-1 Jan Welfare Society. “We have asked the government to undertake for­ensic audit to track the money.” While buyers have taken possession of the flats, the project is yet to get occupancy and completion certificates due to incomplete facilities.

An unlisted company, Amrapali owes Rs 140 crore to the Noida Authority for the land it acquired. The Nat­ional Company Law Tribunal has given Bank of Baroda the nod to initiate insolvency proceedings against Ultra Home Construction, which holds stake in all Amrapali projects. This is the fourth Amr­apali group company facing insolvency. The others are Amrapali Infrastructure, Amrapali Media­vision and Amrapali Silicon.

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“As many as 200 projects of 30 major developers can be classified as sick, based on ground survey by our members,” says Mahesh Dutt, president of the newly formed Radical Realty Media Foundation (RRMF). Representing thousands of home buyers’ groups across 11 states, RRMF has sought forensic audit of all the developers who have failed to deliver their projects. In most cases, the buyers have continued to pay EMIs ­despite little progress on the projects for several years.

“Credible developers should be brought in as co-builders or ­investors to complete the ­delayed projects.”
Jaxay Shah President, CREDAI

E-mails to some of the companies, including Jaypee and Unitech, and the Confederation of Real Estate Dev­elopers’ Associations of India (CREDAI) on the reasons behind the crisis in the real estate sector brought forth no res­ponse. CREDAI president Jaxay Shah, though, stated in an SMS that the industry lobby had approached the Centre and UP government for “exploring various options to resolve the problem. Some suggestions involved bringing in credible developers as inv­estors or co-builders to complete the delayed projects, with the aim of dir­ectly add­ressing home buyers’ issues and enh­ance their perception of the ind­ustry and developers, in particular.” Neither the Centre nor the UP government has responded yet to CREDAI’s suggestions. The delay in government action is harming the real estate sector by dri-ving out investors.

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Ramesh Nair, CEO and country head of JLL India, says several factors have contributed to the overall lack of growth in the residential property space over the past two or three years, including a rising trust deficit between developers and their customers. “The lack of trust was justified, given the massive project delays and deviations taking place,” says Nair. “Many developers were siphoning off funds collected for one project to launch new projects, causing a loop of too-thin funding for each project. While this was one of the main reasons why projects were getting delayed and even stalled, another common factor was the inefficiency of the project approval system in various government agencies and departments.”

Samir Jasuja of PropEquity says the problem got exacerbated as many developers embarked on more projects than they could handle. The developers are also prone to transferring money from one project to another, or acquiring more land banks, or using the money received to pay off debt or interest charges that were piling up. “So the dev­elopers were not using the money for completion of core projects,” says Jasuja. “Many did not have the execution capacity to deliver so much, but oversold their projects. For instance, Amrapali sold 25,000 units, though it had not even constructed 2,000 units in a year. Once the money taps dried up, they were in a total mess.” Today, both investors and end users seem to have lost faith in the real estate market.

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Not just big developers but even smaller ones like Urbania, Vasundhara, Mascot, Morpheus, Patel, Nirala, Elegant and Dev­ika are far behind their delivery schedule. According to a study by PropEquity, while delay in some NCR projects is as much as five to seven years, the average is around three to four years for 604 projects comprising around 3.5 lakhs units.

Industry watchers blame the UP land allotment policy for much of the mess in Noida and Greater Noida. The provision enabling builders to acquire land on payment of just a fraction of the cost led to the creation of land banks using buyers’ money. Ironically, the UP authorities are now having to crack the whip to collect piled up land dues from developers.

The mess in the residential real estate market is due to a combination of factors, say experts. The market went through a phase of slowdown starting 2013-14. In NCR, which is more of an investor-driven market, inv­estments in real estate almost stopped during the slowdown. Demone­tisation worsened it. Deep Kantawala, head of ICS Real Estate Partners, says the market environment has become non-­conducive for doing business, resulting in slow sales.

“Developers are not able to generate the required cash flows to keep their projects going, and many are unable to adapt to the stringent requirements of the Real Estate (Regulation and Dev­elopment) Act (RERA). As a result, many are facing now bankruptcy,” says Kantawala, who is also CFO of the ICS Group, a diversified real estate and fin­ancial services group. He points out that slowdown in sales over the past couple of years has coincided with the stock market performing well. Experts are now banking on RERA to improve the situation, by making it mandatory for developers to deposit 70 per cent of payments received from sales in a project account, enabling greater scrutiny on project expenses. But a larger reform push and forensic audit to trace the missing crores of many “bankrupt” bui­lders is still awaited.

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