Hyderabad: A 24-year-old expatriate working in one of the wealthy Scandinavian countries calls up his friend to seek his advice on an offer that he came to know through one of WhatsApps groups. The offer was enticing. It required him to buy a piece of land on the outskirts of Hyderabad along with a few others, with a promise that the capital appreciation would be 100 per cent within a couple of years. This offer in real estate terminology is referred to as the prelaunch sale of Undivided Land Share (ULS).
The expatriate’s friend knew the dynamics of the real estate market and was loath to advise him to go ahead, for he knew the pitfalls. But the expatriate was gung-ho about the return on investment and was confident about it, going by the advice of his other friends.
While his friend somehow wriggled out of the predicament of offering wrong advice or encouraging the expatriate to invest in a shaky concept, the Undivided Land Share concept swept through the Hyderabad real estate market — tapping its preys through the social media, without attracting regulatory oversight and hoodwinking the RERA regulations.
The pre-launch sale of the Undivided Land Share concept involves a builder pooling together tens or hundreds of people — depending on the project size — who could make the full payment of the proposed flat. The builder would use the money pooled in from such individuals to buy the land from the landlord. The land would be divided among the prospective buyers and registered in their names as the Undivided Land Share.
The builder then gets into a development agreement with this group of people, who would be promised flats in proportion to the land that they own.
The key aspect that makes this pre-launch sale offer mouth-watering is steep discounts. The builder would typically offer the flat in the project, which is just on paper without any government sanctions, at one-third of the market price. The prospective buyers would be made to believe that capital appreciation would at least double in just two years or so.
While on top of it, the offer appears to be a winwin solution for the builder and the buyer, the ULS has left organised construction companies fuming, and experts, tracking the real estate sector, worrying about the viability and sustainability of the sector. “The Hyderabad real estate market will crash by March,” declares Dr Y. Kiron, the chief executive officer of SuchirIndia Group.
Elaborating his dire prediction, Dr Kiron says, “Not very long ago, the Hyderabad real estate market used to be the endusers market, where a majority of the buyers had bought houses to live in. But now, the prelaunch sale concept has attracted pure speculators on the premise that they could cash out after the project completion. Even if the project gets completed, the investors and the builder would not find people to buy property at market prices, leaving them with huge unsold stock.”
Most people are, in fact, Dr Kiron claims, ready to wait for the pre-launch sale offers from the other builders than shell out the market price for buying a flat in an already constructed project. “This would, ultimately, turn Hyderabad into a seller’s market and force them to resort to a steep correction in the real estate prices,” he said.
According to data released by Anarock Property Consultants, the builders are sitting on an unsold inventory of 58,535 units as of September 30.
The inventory on June 30 was 50,580 units. While nearly 8,000 units were
added to the market between July to September, the real estate sector managed to sell only 6,735 units in this period, leading to an oversupply in the market.
“Hyderabad turned out to be the only city in India with the highest increase in the available inventory with nearly 58,535 units available for sale. Furthermore, a sharp rise in the new supply over the past few quarters has increased the city’s available inventory by 113 per cent compared to the same period in the previous year,” said Prashant Thakur, director, Anarock Property Consultants in a statement.
The pre-launch sale concept has brought an already over-supplied Hyderabad real estate market on the verge of a correction, says C.Shekar Reddy, the past national president of Credai.
Shekhar Reddy says the pre-launch sale concept violates the Real Estate Regulatory Authority regulations. “The moment the buyers purchase the land and enter into a development agreement with the builder, they would be liable to those buying the flats later on. But many people get into this trap unaware of the legal complications,” he explains.
Apart from the open auction of land parcels by the government, he also believes that the prelaunch sale concept is also responsible for a spurt in property prices in the city.
Concurring with this hypothesis, Veera Babu, the managing director of Cushman & Wakefield, claims that one of the arguments against the builders resorting to pre-launch sale arrangements is that they were not negotiating hard with the landlord.
Though he admitted that the price correction could happen in the Hyderabad market, he refused to put a timeline to it. “The past records show that the real estate prices correct once in every 10 years. However, there has not been one in Hyderabad since 2008,” Veera Babu said.
People, who opted for the pre-launch sale offers, would be in deep trouble if for some reason the builder fails to construct the project completely.
“The pre-launch sale was already used to the hilt in other markets like Noida in the National Capital Region among others and people have suffered immensely when major builders could not complete the projects. In Hyderabad, however, the companies without any previous record are opting for a pre-launch sale model. But if they go bankrupt or leave the unviable project, the buyers would have no recourse and they cannot do much with the undivided land,” he explained.
Vishal Srivastav of Mahaveer Constructions is optimistic about the prospects of the city’s real estate market, but insists that people must do their homework about the builder before they buy a flat.