Emerging trend of ‘Build & Sell’ model in housing

By Vinod Behl

Three years ago, when Manav Singh, an aviation entrepreneur from Shimla, forayed into real estate with the launch of a mega 100-acre luxury township in the picturesque Auramah Valley, next to popular tourist spot of Naldera in Himachal Pradesh, he was treading on an alien and risky terrain amidst the real estate slowdown.

But today, after successfully selling all the 50 units (apartments, duplex and villas) in the first phase, delivering 85,000 sq ft of residential real estate, he has made a mark with about 50 percent appreciation registered by his RERA-compliant property over the last three years and by establishing an all-new concept of Build & Sell in the housing market.

Singh, promoter of Imperial Realty and Developments Limited, who has now launched the second phase of his township, took to the Build & Sell model as the credibility of developers had hit an all-time low due to large-scale delivery defaults, with buyers shying away from investing in under-construction homes. His strategy paid rich dividends as he could sell all the inventory in the first phase without any marketing costs and simply by word of mouth.

In the present scenario, when the housing sector is severely hit due to the lack of buyers' trust, the Build & Sell model holds significance in restoring the trust of buyers/investors. Today, prospective home buyers don't want to invest in under-construction homes and see their money getting stuck. It is because of this precise reason that there has been a sharp decline in the off-take of under-construction homes. On the contrary, there is a growing demand for ready-to-move homes where buyers don't run the risk of losing their capital.

Moreover, they get what they pay for in terms of space, amenities, specifications and quality. It's here that the Build & Sell model comes handy. In this backdrop, India's largest real estate developer, DLF, is mulling this new model instead of marketing under-construction properties as most of them face long delays and there are issues pertaining to the quality of construction.

The recent enactment of the Real Estate Regulation Act (RERA) may well give the required push to the Build & Sell model as one of the key provisions of the law, cleared by parliament last year, with a May 1 deadline for its notification by states, relates to severe punishment -- including jail terms -- for defaulting on timely completion and delivery of projects. Also, only those projects with prior regulatory approvals can be sold to customers under the new law.

Leading real estate firms, like Mumbai-based Hiranandani and K. Raheja Group and Bengaluru-based Brigade Enterprises, are fine-tuning their development model/strategy, in line with RERA, by making their staff conversant with the provisions of the new act, besides taking the services of RERA-compliance experts to ensure that project approvals and construction happen in accordance with the law.

Key players like DLF have been putting proper systems into place and outsourcing project work to outside professionals and project management consultants. The companies are also deploying technology to speed up construction. Real estate experts believe that sound development strategy and efficient processes are the key to stay on the right side of RERA. This will also prove to be enabling framework for the Build & Sell model.

Today, the model has assumed greater significance as the earlier practice of developers raising construction finance from property buyers before required regulatory permissions were in place has been banned under RERA. Even 70 percent of construction-linked payment received from customers has to be put in a project-specific escrow account and cannot be deployed in any other project.

However, there are various hurdles before this model, including expensive land acquisition. Since land forms a major part of the project cost, for adopting Build & Sell model, it is desirable that the developer has land with him or, alternately, entering into partnership with land owner would come handy. Especially as there is no bank funding available for land and bank funding for real estate projects doesn't come easily.

A reputed developer, with credibility and good track record, stands a better chance of adopting this model as he has greater access to funding, including cheaper bank funding. The success of this model will also largely depend on significantly reducing the development cycle by using technology and by better project monitoring and project management and in turn bringing down the project cost.

(Vinod Behl is editor, Realty Plus, a leading real estate monthly. The views expressed are personal. He can be reached at vbehl2008@gmail.com)

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