The Game Changer

Buying an apartment when it's still a hole in the ground involves more risk than money in your bank account: you don't know for sure that the project will get finished. DLF’s new build and sell strategy plans to change the way the real estate game is being played

In the real estate development world, buying an apartment early in its sales cycle is likely get you the lowest prices. But just because the early bird supposedly gets the worm doesn't mean it's the best strategy. As they say, an offering plan does not a building make. In fact, there are plenty of reasons to make your purchase after the developer has already built the condos. This is exactly what India’s largest builder, DLF, plans to do: design, build and then sell apartments. The debt-laden developer is ready to take the huge risk – maybe more debt, too – and force others to toe the line.

According to the new business model, India’s top real estate developer will build and complete residential projects before selling apartments. But this depends if the deal by its promoters to sell 40% stake in the company's rental arm for Rs 12,000-14,000 crore goes through. According to a report published in Economic Times quoting DLF sources, "The company's development arm will then look at a business model in which it will build and complete residential projects and only then sell apartments in those.” The sources told ET that initially, it will do this for already launched projects and then when markets improve, the same strategy will be applied to all its new launches as well. This would take away the risk of creating third party interest in a project. In its already launched projects, DLF has an unsold apartment inventory of around Rs 15,000 crore, which includes finished and under construction unsold apartments. Saurabh Chawla, senior executive director-finance at DLF, said this is a model the company could look at once the deal is done, subject to board approval. He also pointed out that the home sales market is still a little soft, so new projects will be launched only when the scenario improves over the next few quarters as the positive impact of lower interest rates creates a conducive environment on the ground. The DLF strategy, however, is good news for future buyers. Purchasing a pre-sold condo is a lot riskier in these times than one that is completed and built already. Moreover, in a recessionary economy when most companies are trying to just survive, the ability of the builder to be able to finish the project is very important. Buying into a development before construction has begun has always been the preferred route, but with the slowdown in the real estate market, the rules are changing. A few years ago, the incentive to condo buyers was clear: You would buy early, sit back and, by the time the building was in place, be pretty certain that the unit’s value had increased substantially. But the days of buyers lining up for a condo in a building that might be years from completion are gone — and developers are facing a new reality. In the heyday of the Delhi NCR condo frenzy, a whole project would sell in a few months, but now it might take a year to sell 100 units. But even with the falloff, preconstruction sales are continuing, however sluggishly, in most parts of the country. What seems to have changed, however, is the DLF mindset. We don’t know many developers can say, “If I build it, they will come.” For most builders, the same old style still holds true: “If I sell it, I will build it.” They are relying on preconstruction sales to give them the green light to break ground. That means that in Delhi NCR - the market with the largest drop in construction activity - it is questionable whether some planned projects will actually be built. People thinking of buying early at a new project that might be years from completion should take certain steps to make sure that they protect their investment and end up with what they expect. In fact, we recommend that buyers looking at preconstruction sales negotiate an exit strategy in their contract, especially as lead time grows longer. If the developer doesn’t build by a certain day, it triggers your right to get out of the agreement. There are also other potential pitfalls. Because buyers usually see only floor plans, and perhaps artist’s renderings or model bathrooms or kitchens, they do not know how much light an apartment will get or whether a large bed will fit in the bedroom. When the building is completed, the reality can be very different from what the buyer expected. Another expectation that is not met is the overall size of the apartment. Yes, the square footage is provided in the offering plan. But the small print almost always includes a disclaimer noting that the actual square footage may be different. But even with all these caveats, many people feel the need to buy early. Though most of us are well aware that the project won’t be completed in the stipulated time, we are just fine with it. Why? Because we feel that in the right development, if we are willing to take a little risk upfront and don’t mind having our money tied up for a while, we can make good money. But in these desperate times, you need to factor in the big downslide  of jumping into the water first and you really don’t know if this is going to be the hit they say it’s going to be. Or it’s going to sell the way they thought it would, and here you're locking in your price.