The reality of real estate

R BALAKRISHNAN 27/02/2013 02:28 PM

My ordeal with a real estate investment in an under-construction
property and the lessons learnt

I would like to share a real-life experience in real estate investing. In 2007, I
had booked an apartment in a premium project called Estancia, promoted by
Arun Excello in collaboration with L&T. The former took care of sales,
financing and such while the latter was responsible for the actual construction.
It was billed as Chennais first integrated township, located in proximity to an
emerging industrial and services hub. Although the project was on the wrong
side of the airport, close to the Sriperumbudur area, along with several other
projects, the connectivity to the airport by public transport was reasonable.

My choice was based primarily on the faith that the construction company,
L&T, had an equal stake in the project and, hence, believed it would be
completed. Even if it was delayed, I assumed I would get the flat as promised. I
now realise that none of these beliefs was a contractual obligation or a written
commitment given by the builder.

Sometime later in that year, I was told that the flats would be delivered by
December 2008 and, with a grace period of six months, at the latest by June
2009. Since the builder had promised to pay a penalty of five rupees per square
foot per month to me in case of delay, there was some consolation. In other
words, delay in delivery would mean that my cost per square foot would be
lower by five rupees per month of delay. This was the first instance in Chennai
of such a penalty clause by a builder, since closing down of Alacrity Housing. I
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understand that now it is a standard practice for builders to offer some interest
payment, or compensation of some sort, in case of delays.

The project was supposed to have six towers in the first phase; I was allotted
the flat of my choice in Tower 4. In early 2009, trouble started brewing. Project
delays were visible; apparently a lot of NRI
bookings were cancelled, after the Lehman
Brothers crisis. The builder decided to go
ahead with only three towers in the first phase.
The foundation for the fourth tower had barely
been laid. Thinking that my capital was not at
risk, I persisted with my investment, when I
should have pulled out of the project. At this
stage, I made my first mistake.

Around 2011, when a progress payment was
due to the builder, I was told that the cheque
should be made out in the name of a different
entity. The initial name was L&T Arun
Excello; now, it was simply Arun Excello! I
found out further that while L&T had
constructed the first three towers, the
remaining construction was to be executed by Arun Excello.

When I tried to make enquiries, I was never told of the facts. The sales people,
at some point in time, tried to persuade me to buy a flat in one of the first three
towers. But since the flats that were available did not suit my requirements, I
refused. I even ventured to make the full payment, provided I was
compensated for early payment in a fair manner. Unfortunately, the terms
were not suitable as the compensation they were offering was way less than
what I had asked for. I skipped their offer. Time elapsed.

In January 2013, I was told that they would be giving final possession soon. I
was called for an inspection. On going there, around 40km from where I stay,
I found that the lift was not functional yet and climbing 10 floors was a stiff
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challenge. Still, having done that, I found that they had unilaterally changed
the specifications also. They had also changed the parking set up; the partner,
L&T, whose name was a major factor in my purchase decision, was no longer
there.

I sent an email to them complaining about the inspection, the change in
specifications and about their lack of communication about their parting ways
with L&T. What I got was a terse reply that my allegations were baseless. They
said that they did not invite me for any inspection and that the contract
mentions that specifications can be
changed without the buyers permission.
About their parting ways with L&T, there
was total silence. The response clearly
drove home the concept of caveat
emptor. I had been taken for a ride!
Yes, the financial implication of the
entire investment is that my liquidity has
been destroyed and the final returns on
my investment are likely to be lower than
the interest on a savings bank deposit for the period. If the project had been
delivered on time, I would surely have earned some rental income which would
have been higher than the penalty for the delay in possession. However, I
must say that the project, from a price point of view, is a reasonable one if one
were to invest today, and there is less likelihood of prices crashing by more
than 20%-30%. The lessons for me are:

i) Never trust a builder, however big the name or reputation;
ii) Never trust a joint venture;
iii) Never book a flat if delivery is not clearly committed, unless you are a
pure financier;
iv) Do not fall for any sales pitch that is not expressly mentioned in the
contract;
v) Even if one has to pay a higher price, it makes sense to buy a flat that is
ready.
vi) Real estate is all about location, location and location. It is better to buy a
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tiny flat in a prime area rather than a palace in a desert.
vii) Liquidity in real estate is a myth.
viii) Returns are lumpy, bumpy and uncertain. Anticipation of a location
becoming more valuable is a mere guess.

Yes, I am aware that most of us book flats at various stages of construction,
from launch to ready-for-use. We all want to lock in early because we fear price
escalation. Buying the first house is a necessity that demands the least risk. On
the other hand, one tends to be less cautious while buying a property for
investment. I have come to the conclusion that the measure of due diligence
should be no less for a second home than as it is for any other investment.
Money has alternate uses and real estate investment is just another form of
diversification.

There is also a difference between buying a plot of land and a flat. In the case of
a flat, one wants to ensure that if one is not going to live there, the rental
income will be an important factor of the return; whereas, for investment in
land, one has to be patient, speculating on the appreciation in land value alone.
While buying a flat, there is also no guarantee about what we see and what we
get. We get carried away by model flats which often use materials and eye-
candy accessories to tempt the buyer.
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