Commercial activity moving to the Tier-III cities in India

By Vipin Agnihotri

Increasing realty costs in the metropolitan cities of India has seen commercial activity move to the Tier-III cities. It has come into the notice of The India Street that property prices in cities like Agra, Jaipur and Lucknow corrected sharply by around 20 to 25 percent following increase in the interest rates in the last six months. All this has happened due to gap in demand and supply in these cities.

The pivotal factor here is that although supply increased in the last two or three years, no fresh demand generated as hardly any new commercial establishments came up in the Tier-III cities. In my opinion, at the first place due to boom in real estate market, investors invested in these products, as the cost of the fund was low. But with the rise in interest rate, investors are finding it real tough to invest in the realty assets. This in turn means that the developers are also finding it tough to sell their project in the Tier-III cities.

According to experts, those investors who had invested in real estate sector earlier want to exit. This is because of the simple reason that there not many end users in the Tier-III cities. But signs are that the hard days would soon be over in these cities. “With the increase in rentals and cost of labor in Tier-I and Tier-II cities, Tier-III cities have emerged as alternative commercial centres where off-shoring facilities could be shifted,” pointed out Rahul Mahajan of Rahul associates.

The recent survey has come to the conclusion that whilst all the Tier-III cities provide for prospective cost arbitrage opportunities for off-shoring facilities, the development and demographic profiles vary substantially across the locations, giving different business risks.

The only downfall with these cities being the non-availability of top-notch telecommunication infrastructure and big pool of suitable professionals. There is no doubt that infrastructure support, governance, cost of living, quality of life, operating cost, would determine the attractiveness of a location to emerge as an alternative commercial center. Plenty of small towns and cities builders are guaranteeing returns through rentals on the investment after completion of the projects. However, in my opinion if Indian economy continues to grow at 8 to 9 percent per annum, the commercial activities in the Tier-III cities are bound to pick up.

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Foul Practices On The Rise

By Dhruva Jyoti Chowdhury

Kolkata, India: Just recently, the District Town Planning Department approached the Gurgaon District administration for lodging an FIR against a Delhi builder for indulging in illegal pre-launching of plots through brokers for a colony in the Haryana town. Another Delhi-based builder is under the scanner of District Town Planner, Gurgaon, for collecting money for pre-launch of a Golf Homes project.

The entire business of pre-launch sale of property revolves around the chain formed by developer, big investors and brokers. The investor comes first in the chain of command who is approached by the developer. He invests in the project, normally on the promise of about 40 per cent appreciation in property price at the time of the launch. Some big- time brokers are also involved in underwriting the project. Keeping in view the dimension of the entire business, some big-time investors have even formed joint ventures with developers on revenue-sharing basis for pre-launch projects.

The broker or estate agent is the most important link in the pre-launch business. “Since pre-launch is not a legally accepted practice, the developer does not come directly into the picture. Moreover, most of the investors cannot approach secondary market to find buyer for their booked property. Therefore, the real estate agent plays a key role while interacting on behalf of the developer with investor and on behalf of the investor to sell the property again in the market,” says real estate expert Rakesh Purohit. And the broker gets good rewards as well since he gets as much as 4-8 per cent commission (double the normal) for high risk pre-launch projects. It is this lure of big money which has drawn shopkeepers, business men and retired people into property brokering business. With such fat incentives, brokers have become bolder and pro-active in the attempt to hook common people to invest in such properties. “It is not just gullible, ill-informed retail investor but even well-educated and well-informed senior corporate executives with heavy pay packets and ESOPs who are involved in this gamble of striking it rich in short time. These people have lot of surplus funds to invest. An entry-level executive couple in an MNC takes home about Rs 16 lakh annually. So besides investing in their first home, they are putting in lot of money in pre-launch properties,” informs a leading broker of Delhi.

A well-known builder that is known more for its interests in non-realty business faces an FIR by Haryana Town & Country Planning Department for allegedly doing illegal pre-launch bookings in Rewari township falling under NCR.

A little known developer under the pretext of pre-launching a residential project in Indirapuram collects about Rs 3 crore and vanishes overnight leaving seven dozen retail investors high and dry.

A leading Delhi-based real estate developer that claims to have pan-India operations is rapped by Haryana government’s Town & Country Planning Department for making a false claim through an advertisement about setting up a housing project near Chandigarh. Following this, a broker through newspaper ads solicited pre-launch bookings in this project for which no permission or license was reportedly granted to the company by the authorities.

Few months back, Jaipur Development Authority issued a caution notice in city’s newspapers warning people against investing in few residential projects of well-known Delhi developers in the city who were allegedly engaged in bookings for these projects.

These are just some of the representative cases of pitfalls of pre-launch properties – a mere tip of the iceberg of such illegal transactions that could well ruin the rosy dreams of retail investors lured by the builder- investor- broker nexus to make fast buck.

Now look at the other side of the story where many property buyers have burnt their fingers in their greed to book huge profits on their investments in a short period.

Rajesh Chopra (name changed), a corporate executive, bought 5000 sq ft of retail space in a mall in Indirapuram developed by a relatively new developer in pre-launch scheme in June-July 2005. He invested close to Rs 50 lakhs on the builder’s promise that the project would be launched in two months’ time and he would then be able to book good profit on his investment. But the developer ran into financial problem and the project was shelved. Having failed to get his money back, Chopra has taken recourse to litigation.

Sumit Khanna (name changed) invested Rs 17 lakhs (more than 25 per cent of the cost of a flat) in a pre-launch scheme floated by a builder in Gurgaon on the understanding that he would be able to earn a handsome profit after the launch in 2-3 months. Now even after a year, the project launch is nowhere in sight.

Another retail investor Raj Singh (name changed) invested Rs 8 lakhs under the pre-launch scheme for a residential project in Faridabad but it is already a year and the promised launch has not been made with the result that his investment is stuck.

There could be many more such cases of gullible and greedy retail investors who have been short-changed by developers in various pre-launch schemes.

Interestingly, this phenomenon of pre-launch is mostly prevalent in Delhi NCR and north India in Haryana, Punjab, Uttar Pradesh and Rajasthan. This is clearly evident from the rush of newspaper ads of pre-launch projects from the north. “This is largely because of the fact that north Indians are more adventurous in risk-taking and they have seen the benefits of financial jugglery by north Indian developers,” says an eminent broker engaged in pre-launch business. Following the pre-launch rush, states like Haryana and Rajasthan have particularly become alert. Says S P Gupta, Administrator, HUDA, Haryana, “Pre-launches without proper license is a serious violation of Haryana Urban Area Development Act and we’re initiating action against the erring developers.”

Though pre-launch sale of properties has been going on for over two years, it has now become much more pronounced with builders going overboard in their zeal to scale up their operations and emerge as pan–India players. And in the process this game of property pre-launch has assumed dangerous proportions. Unlike in the past when mostly investors and brokers were involved in pre-launch business, now more and more small retail investors and end-users are being roped in so much so that small time investors from places like Bhatinda or Jharkhand are being lured to invest in such schemes.

The extent to which this pre-launch business is flourishing can be gauged from the large number of ads from the brokers which appear in newspapers. While some ads carry the names of developers and projects, others are simply about pre-launch opportunities in specific cities.

Pre-launch is being resorted to by developers in order to raise funds and to sell a major part of the project in advance and also to create a hype in the market. This creates curiosity among buyers and as they go on a property-buying spree, the developers sell it on a premium price. And all this without taking the pain of developers getting bank loan for which the builder has to make certain disclosure about his project and finances. Through pre-launch, the promoter can manage to raise 25-30 per cent of his total project cost which is sufficient to purchase land and pay for the necessary approvals as total project cost includes development cost, administrative and promotional expenses including profit margins.

By just paying the booking amount one can claim his or her right to residential and commercial property offered on pre-launch basis.

The understanding is that the builder or developer will do the actual launching of the project at a higher price so that investor at the pre-launch stage can book a profit and exit the project. The company keeps on increasing the price of original booking to create resale market. The rates of return can be quite high as investors make only partial payment to the company at the pre-launch stage.

But then there is a risk involved here as pre-launches are normally done for projects which have yet not been approved by the authorities. In many cases, the developer doesn’t even have the land for his project. There are several instances where developers announce 50-100 acre township project but they tie up only for 10-15 acres of land by giving advance money. Recently, a leading Delhi-based real estate developer, which has a number of group companies engaged in pre-launch bookings, was exposed by the town planning authorities in Sonepat.

Most of these corporate executives do not mind putting their money at risk. Says Ramesh Menon, working for a leading real estate consultancy in Gurgaon, “We deal with lot of corporate executives and 15 per cent of my clients are women. These Gen X executives are investing in pre-launch business with due diligence and with proper risk spread. There’s this financial analyst lady working for a Fortune 500 company who has invested Rs 80 lakh in three different (residential, retail and office) projects. And her target is to grow her money to Rs 2 crore in two years.

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Commercial activities moving to Tier-III cities in India as realty costs increase in metros

By Dr Suvrokamal dutta

Increasing realty costs in the metropolitan cities has seen commercial activities move to the Tier-III cities in India. It is worth mentioning in this regard that property prices in the Tier-III cities such as Agra, Jaipur, Lucknow and Chandigarh corrected sharply by around 20 to 25 percent following rise in the interest rates in the last few months.

In my opinion, this is mainly because of gap in demand and supply in these cities. No doubt, supply has increased in the last couple of years but no fresh demand is generated as hardly any new commercial establishments came up in the Tier-III cities.

If experts are to be believed, at the starting stage due to boom in the real estate market, investors invested in these products, as the cost of the fund was low. But with the passage of time as interest rate almost doubled from 6 percent to around 12 percent in the last few years, investors are finding it real tough to invest in the realty assets, which implies that the developer are finding it hard to sell their project in the Tier-III cities.

Furthermore, it has come into the notice of The India Street that those investors who had invested in real estate sector, want to exit. Point to be noted here is that as there are not many end users in Tier-III cities, prices have started dipping. But, looks like, the hard days would soon be over in these cities.

With the increase in rentals and labour cost in Tier-I and Tier-II cities such as Delhi, Mumbai, Bangalore and Pune, the Tier-III cities such as Chandigarh, Jaipur and Lucknow have emerged as alternative commercial centres where off-shoring facilities could be shifted.

Few of the prominent players that have moved to Tier-III cities are Dell and Infosys to Chandigarh, Wipro and US Software to Kochi, Genpact to Jaipur and TCS and Tata Technologies to Lucknow.

“If Indian economy continues to grow at 8 to 9 percent per annum, the commercial activities in the Tier-III cities are bound to pick up,” pointed out Anirudh Yadav, business journalist based at Lucknow. In theory, the Tier-I and Tier-II cities are already overcrowded. What’s more, rentals in these areas have increased around four times in the last four years. Taking this into consideration, in medium to long term, growth in the country would come from Tier-III cities. That’s why, the investors, who enter the market early, are likely to reap benefit the most.

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