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Home Truths And Lies

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In a landmark judgement on 16 August, the Competition Commission of India (CCI) imposed a penalty of Rs 630 crore on India's largest real estate builder, DLF, for abuse of its dominance and for imposing "arbitrary, unfair and unreasonable conditions" on apartment allotees of one of its properties located in Gurgaon, NCR.

It is a wake-up call for the entire real estate sector. Builders — both reputed and dubious — use every legitimate and illegitimate trick in the trade, while their profit margins have been known to climb to 36-42 per cent in the past, higher than that of information technology.

At one time, buying a house was a truly gratifying process. But as the pressure to provide housing began to rise, two things happened. One, seeing the burgeoning demand and the opportunity to cash in, many new and often inexperienced companies entered the business. Two, people started buying apartments, mostly in suburbs, and satellite towns sprang up. Some were planned, while others were pushed by builder lobbies. Delhi got Gurgaon and Noida, Mumbai got Navi Mumbai and Vasai Virar, Bangalore got Whitefield, Sarjapur and Yelahanka, Kolkata saw Salt Lake and Chennai saw development on the Old Mahabalipuram Road.

Some of the lesser-known or dubious developers that came up during this period were in a hurry to scale up and cash in on the boom. Land being a state subject helped them exploit the system as did corrupt politicians, lax municipal bodies and ignorant customers.











JAMES ABRAHAM, Gurgaon, Abraham leads World Spa Action Group, which is seeking compensation for buyers through legal means (BW Pic By Bivash Banerjee)

Real estate, like other sectors, goes through booms and busts. In a boom, complaints from home buyers are fewer since most investments are growing. It is during a bust that most buyers notice some of the malpractices that many developers indulge in.

But today the extent of malpractices has grown to the extent that many buyers are up in arms. Blogs, websites and consumer forums filled with buyer grievances have sprung up. Complaints have multiplied at a faster pace than the demand for housing.

Late, Late, Late
Perhaps the biggest complaint against almost all developers is the extent of delays and the abysmal penalties paid to compensate for these. Developers cite various reasons for the delays: scarcity of funds (tight lending norms), labour problems and high input costs.

While these may be true, buyers are in no mood to listen. What irks them the most is the meagre penalty amount associated with delays. The standard penalty in a buyer's agreement is Rs 5 per sq. ft per month, which brokers and buyers say is "peanuts". In some cases, developers have doubled the penalty to Rs 10 per sq. ft per month, but this, too, is very little.

"These penalties are meant to deal with reasonable delays of a few months or at most a year. When the delays extend to five years, this is just an excuse to raise very low-cost capital with no RBI or regulatory body providing oversight," says James Abraham, who leads World Spa Action Group, which has been formed to pursue compensation by legal means.

Brokers feel penalties should cover the interest costs borne by buyers to some extent and should be at least 10 per cent. They point to projects such as MGF Vilas in Gurgaon (it was launched in 2004 but is still incomplete).

Take Rakesh Seth's case. He bought a flat in 2005 from Unitech in Unitech Cascades, Greater Noida. The contract drafted by the company says any delayed payment by the buyer would attract an interest rate of 18 per cent per annum. But if Unitech delays construction, the penalty is only Rs 5 per sq. ft on a price of Rs 2,475, or less than 2.5 per cent per annum. "This is grossly unfair to start with," says Seth.

But his story does not end there. After over a three-year delay, Seth was informed by the developer that the flat was ready and that he should make the full and final payment. He did this in April 2011 and got legal possession. Physical possession was to be given in early June 2011. The company took two years' maintenance charges upfront starting June 2011 without which, they insisted, they would not accept the final payment and give possession.











SANJAY BHASIN, Gurgaon (BW Pic By Tribhuwan Sharma)

Now, at the end of August, Unitech executives have told Seth that physical possession will not take place before November or December 2011. Says Seth: "That's six months instead of six weeks! I wrote to them and called, but they are unwilling to give in writing as to how they will compensate me for the delays."

On being contacted by BW, Unitech replied: "We have already offered possession in four towers in Unitech Cascades. Also, the penalty being paid is more than the prevailing market-rental in the vicinity."

Some developers announce many new projects at a go in an attempt to ‘launch' their way out of a cash crunch. Says Abraham: "There should be a simple regulation that no developer (or related company) can launch a new project if any of their previous projects are delayed by more than 18 months." 

What You See Is Not What You Get
The entire marketing of a project, right from its soft launch, is misleading. Says Ajayya Gulati of Future Gold Properties, a Gurgaon-based real estate agent: "Advertisements misrepresent the facts. The developers typically show a massive green area covered with trees and make you feel you will spend the rest of your life lying in a hammock. The reality is you are surrounded by skyscrapers and slums."

A sample flat, for instance, uses the best materials, but not so for the real flats. Unitech's World Spa is an example. Recently, the roof of a 14th floor apartment crumbled and the tenant had a narrow escape. Says Jyoti Pande Lavakare, a Delhi-based columnist and owner of the flat: "The quality of construction is abysmal." But Unitech denies allegations of poor quality.











Ray Of Hope
The biggest angst for buyers in the past has been that in the absence of any regulator, they have simply had no recourse and are at the builder's mercy. Real estate remains a state subject and out of the Centre's control. In most states, builders' lobbies are in cahoots with local politicians and bureaucrats.

But of late, the wind has been blowing increasingly in the direction of consumers. Says Vinod Sampat, a Mumbai-based advocate: "More and more decisions in consumer courts are going in favour of buyers. In fact, almost 70-75 per cent of the cases in consumer courts are being settled in their favour."

Sampat says Maharashtra has started a ‘housing darbar' on the first day of every month, where senior government officials resolve disputes there and then. Some states have started expediting hearings for senior citizens.

And since last week, the biggest ray of hope is the CCI which has been flooded with complaints ever since the DLF-Belaire judgement was announced. Sanjay Bhasin, president of Belaire Owners Association, says his phone has not stopped ringing since the judgement came out with pleas for help. If the CCIs and the Bhasins of the world come together, the unscrupulous elements of the real estate sector will have to answer.


break-page-break
In Bangalore, the residents of a condominium being built by L&T ECC's construction division and Dinesh Ranka found that the area of the proposed site had shrunk — from 34 acres to 22 acres. The 12 acres were relinquished to the Bangalore Development Authority (BDA) without informing the buyers and the residents. "We were blissfully unaware of this when we bought the property," says R. Raja Gopalan, president of Sugruha, the residents welfare association. He says this was not mentioned in the fine print and the company did not state this upfront when buyers were paying for the entire 34 acres.

The builders have also failed to build an approach road to the apartment complex, as was promised in the marketing document. The 2,000-odd members of Sugruha took to the streets in April and have filed criminal complaints in the magistrate court and a writ petition in the High Court (to stop the BDA from building a commercial complex on the disputed 12 acres). There are five more cases pending against L&T in the civil court. Recently, the residents have taken the matter to CCI. "We have no way of telling whether even our title deeds are real," says Gopalan.











R. RAJA GOPALAN, Bangalore, Gopalan is president of Sugruha, which has filed criminal complaints against the complex developers (BW Pic By Sanjay Sakaria)

Another common complaint one hears from home buyers is ‘hey, where did that come up from?' The original master plan is often altered the moment a project starts to do well. In some cases, residents have found that they suddenly have a hotel within their complex or face the back of a mall. Towers and floors, too, spring up. So, if buyers were initially told there will be, say, 20 towers, suddenly they learn there are in fact going to be 25 towers within the same area. This was one of the major complaints in the DLF-Belaire case with CCI. In its original advertisement, DLF had claimed that each of the five multi-storeyed buildings would have 19 floors, a total of 368 apartments, and the construction would be completed within 36 months.

However, in place of 19 floors with 368 apartments (the basis on which bookings were made), now 29 floors have been constructed. Says a CCI official who worked on the case: "Consequently, not only are the areas and facilities originally earmarked for the apartment owners substantially compressed, the project has also been abnormally delayed."

Flexi-space
A common problem buyers face is that the flat they buy "feels much smaller" than the square footage they have paid for. In some cases, the actual size of the flat is difficult to determine once the apartment has been handed over.

Second, builders charge the flat owner for the super area as opposed to the carpet area. Also, the same amount is charged per sq. ft even though the super area does not have the same specifications and fittings as the carpet area. "The super area typically includes the lift area, and all common areas in the building, whereas the carpet area is really what is available to the owner. So if the ratio of super area to carpet area is very high, then the flat feels much smaller than was originally claimed," explains Gulati.

Another blatant violation is the claim on common areas. While state regulations on this vary, in many states the common areas within a complex belong to the residents. But builders often retain the common areas and try to make a profit by selling the area commercially.

In Haryana, for instance, the Haryana Apartment Owners' Act says common areas in a housing complex belong to the owners in an undivided manner. However, in most cases, the developers have retained the ownership rights and not passed it on to the residents' associations. This allows the builders to build more towers and apartments, claiming it as part of the same floor-area-ratio (FAR). 

In some cases, developers retain ownership of the common areas in the hope that FAR limits will be increased and then they can build more in the same colonies. "This is the logic they used recently to convert some of World Spa's green area into commercial shops and to claim ownership over the surface parking areas," says Abraham. He says the company is selling shops in areas which should actually belong to the residents. Many buyers have now got together to take legal action. "We are finalising legal advice. We are after various claims: stays, reparations, compensation," he says. Unitech, however, says it is not violating any conditions, and has, in fact, provided more amenities than it was required to.

Dictating Sales
In a project, Amrit Shakti (Powai) by the Nahar Group, flat owners have been unable to sell their flats due to "exorbitant" transfer charges levied by the builder. The project was recommended by HDFC to several NRIs with the highest ratings. When some of the owners wanted to exit the project, the builder — since he wanted to control the price of the apartments — did not initially permit any brokers or prospective buyers to view the apartments. When this was allowed and a sale was agreed to, the builder "held the buyer and seller to ransom by demanding transfer fees that was 30-60 times the legally permitted fees", says one flat owner, who cannot be quoted as he has taken the company to court and the matter is sub judice.











RAKESH SETH, Gr. Noida, Even after a three-year delay, Seth has not got physical possession of his apartment (BW Pic By Ritesh Sharma)

Brokers say transfer charges is an area where builders extract their pound of flesh. There are no norms on how much ‘transfer fee' should be. There have been cases where the seller has paid Rs 10-15 lakh in transfer charges when the transfer is nothing more than a change in the books of the builder. "This should at most be Rs 10,000 towards administrative costs. There is no justification in the transfer charges being a percentage of the final sale price," says Gulati.

Ray Of Hope
The biggest angst for buyers in the past has been that in the absence of any regulator, they have simply had no recourse and are at the builder's mercy. Real estate remains a state subject and out of the Centre's control. In most states, builders' lobbies are in cahoots with local politicians and bureaucrats.

But of late, the wind has been blowing increasingly in the direction of consumers. Says Vinod Sampat, a Mumbai-based advocate: "More and more decisions in consumer courts are going in favour of buyers. In fact, almost 70-75 per cent of the cases in consumer courts are being settled in their favour."

Sampat says Maharashtra has started a ‘housing darbar' on the first day of every month, where senior government officials resolve disputes there and then. Some states have started expediting hearings for senior citizens.

And since last week, the biggest ray of hope is the CCI which has been flooded with complaints ever since the DLF-Belaire judgement was announced. Sanjay Bhasin, president of Belaire Owners Association, says his phone has not stopped ringing since the judgement came out with pleas for help. If the CCIs and the Bhasins of the world come together, the unscrupulous elements of the real estate sector will have to answer.

With inputs from Gurbir Singh and Vishal Krishna

anjulibhargava(at)gmail(dot)com

(This story was published in Businessworld Issue Dated 05-09-2011)