CUTTING SOME SLACK - CASH FLOWS to RESUME SOON!
The real estate activity in the Delhi NCR, especially in Noi da-Greater Noida area, is likely to pick up in the next few months. Reports say that the Uttar Pradesh government is considering a new formula to re-schedule the outstanding dues of developers-who have defaulted payments to Noida, Greater Noida, and the Yamuna authorities towards the cost of the land they bought from them--in instalments.
The practice with these authorities is to sell land to developers after part payments, which vary from 10% to 25% of the value of the land purchased, and the rest recovered in 10 equal annual instalments.
The government is also considering an exit policy for developers, where buyers can return the excess land which they could not utilize for launch of projects owing to the slowdown in the real estate sector in the recent past. This will further reduce the outstanding dues of de velopers.
Reducing the upfront criteria in UP to re-schedule loans will help developers regularize their accounts with the authorities and, converting their books from default accounts to regular ones will go a long way in invigorating the sector, a developer said. A senior officer in Noida authority said that a large number of developers--a majority, in fact--have defaulted on their dues to the authorities, which indicates there is a problem in the business cycle. The officer said the authority would thus like to bring in some schemes that would nudge construction activities back on the fast track and help the sector perform to its potential.
At present, a developer has to pay 25% of the outstanding amount upfront to reschedule his payment.Under the new policy, he is likely to pay only about 10% of the dues and, once the account is regularized, fund flow would improve. This will also help existing buyers who are awaiting for possession for a long time.
Banks do not release funds to a defaulting company. Suppose that a person bought a flat from a developer under the construction-linked scheme and borrowed money from a bank. Assume that though the developer has defaulted payment to the authority, he is still constructing the project. On reaching to certain stage of construction, he raises demand for the next instalment from buyers, who, in turn, direct their banks to release funds to the developer. But, as the developer has defaulted to the authority, the banks refuse to release funds to him, and the construction grinds to a halt.
In the present market scenario where developers are unable to sell flats un der construction, their main endeavour is to finish the project. When construction of the project nears completion, sales pick up. A developer said that they would like to pay the dues to authority at that stage.
However, in a majority of projects only around 50-60% of the flats have been sold out and, with the price realization so low, it is not possible to meet all the liabilities with the current fund flow. Thus, developers want rescheduling of their dues to the authorities, so that their accounts may be regularised and cash flow resumes.
At the same time, a developer cannot start a new project in the remaining part of the land he has bought, if he has defaulted on his dues. A developer said, “If I want to start a new tower in a joint venture with some other developer, so that cash flow resumes and construction activities pick up, I am limited by the law. And, there is no way out of this stalemate.“ Buyers in stalled projects, too, say that they will not pay up till construction activities resume while developers aver that they can't start construction as they do not have any funds with buyers halting their instalments.