Bottom Line: The practice of under-writing has created a peculiar scenario in many real estate markets, where there is an increase in capital values of property, despite a dearth of buyers in the resale market
So you are happy with the price appreciation of your property? Well, so long you are living in that apartment you continue to be so; not when you want to sell it off! Reason: re-sale market offer for the same appreciated property may give you a shock. Worse even, you see the developer advertising at a price point which no one in the secondary market is ready to offer.
Appreciation in property prices may not always mean good news for homebuyers in India. There is a cartel of builder-under writer nexus backed by uge amount of black money that is behind the artificial property appreciation in the market.
In the property market these traders of artificial appreciation are known as under writers. These brokers/financiers who operate as under writers usually under write the projects. The deal with the developer is normally that cases, henceforth they will control the marketing strategy and the price point. A builder, thus, offloads his stock to under-writers and the under-writer sells the stock to end-users or investors.
Based on the artificial demand created, the builder keeps on increasing prices and the under-writer then sells the property at a lower value than the builder’s price. The premium charged by the under-writer, is usually paid in cash by the buyers and this leads to a circle wherein, the unaccounted income/cash component/black money is flushed into the real estate market.
These under-writers make profits through the huge difference between the price of a project at its launch, and the artificially inflated price.
Average buyers, living under the illusion of property prices appreciating, fall prey to the ‘discounted’ prices (which is much higher than the launch price), offered by the brokers/under-writers, who make money through this channel. Gullible home seekers buy, under the impression that there will be a further increase in prices, whereas, actual end-users, who have booked at the time of launch, hardly find a market to exit at that level.
No rational explanation of economics can justify how property prices keep on moving up, despite a sluggish economy and demand. Various research agencies, in recent years, have reported about the amount of unsold stock, lying with developers and how it has increased, over the last quarter or year. While this lends credence to the exprectations of prices to fall, prices of residential properties in India, move only in one direction – up.
Abhay Kumar, CMD of Grih Pravesh Buildteck rather questions that if the appreciation is artificial then why are people investing more in property as against other investment instruments. According to him, builder-under writer nexus is a reality of the past and now the market is matured enough to understand the true growth potential.
“There was a time when the market was growing at a pace which could sustain the artificial appreciation. But not any more! Today the buyer understands the market reality and his investment ROI. So, a forced appreciation is just not possible,” says Abhay.
Nikhil Hawelia, MD of the Hawelia Group, believes that one should look at the secondary market, to ascertain the true credentials of a developer. “If my project is not attracting as much a premium as others in the neighbourhood, in the secondary market, then, I may have failed in my marketing strategy,” admits Hawelia.
It is not just the secondary market that indicates the real versus artificial appreciation in the housing market today. The difference between rental yields and capital values is also an indicator that the price point in most of the property markets across India is not realistic.
By: Ravi Sinha
