A slump in demand for residential real estate has seen innovative financing schemes like the ‘80:20’ and ‘75:25’ schemes return to the market in a different avatar. These schemes come after a brief pause following a cautionary note from the Reserve Bank of India to the banks.
The earlier 80:20 or 75:25 schemes are those where customers were required to pay 20% of the value of the house to the developer and the rest of the amount was sourced and disbursed through a tripartite agreement between the customer, the developer and the bank. Under this agreement, the remaining 80% was given to the developer upfront by the bank. The developer would pay interest to the bank on this amount till it handed over possession of the property to the buyer. After which, servicing of the loan would be the homeowner’s responsibility.
Such schemes were widely marketed by the developers in the last couple of years since it helped improve sales to some extent in a sagging economy characterised by a slump in the housing demand.
But in September, the banking regulator had cautioned the banks against being part of such schemes. While most real estate developers were against this move, some welcomed it as they thought it would bring more transparency to the real estate market.
The concern with such schemes earlier was that real estate developers were getting these loans at rates that were meant for individual borrowers, rather than the corporate rate prescribed for a risky sector like real estate. Also, since the developer was getting all the money upfront, there were chances of misappropriation as these funds could be routed to other projects or purposes, exposing the banks and the customer to risk.
There are two new forms that these 80:20 schemes. One is where the agreement is only between the developer and the customer. Under this scheme, the customer can pay 20% and book the property and has to arrange for the remaining funds through bank debt or otherwise at the time of possession.
The second form is similar to the original scheme with banks being involved, but instead of disbursing the funds to the developer upfront, the schedule of payment has been made construction-linked.
“The change that RBI’s cautionary note brought was that now banks do not disburse the entire money upfront and instead disburse it in a construction-linked manner, which is a good thing,” says Srinivasan Gopalan, chief financial officer and chief operating officer, at Wadhwa Group. The Mumbai-based real estate developer is offering a 75:25 scheme for its Imperial Heights project in the western suburbs of Goregaon.
The need to reintroduce these schemes can be explained with the high levels of inventory that builders are sitting on. According to data released in May by ratings and research firm Liases Foras, real estate developers in major metropolitan cities continue to have higher levels of inventory between 20 and 43 months (the time it is expected to take for the entire stock of residential properties to get sold). Mumbai Metropolitan Region has the highest inventory of 43 months, followed by Hyderabad at 42 months and the National Capital Region of Delhi at 39 months. The normal inventory level for real estate developers in a healthy market is eight months.
“These schemes do help increase sales of a project. It is seen that in a big-ticket project (Rs 1 crore and above), such schemes give a 15-20% fillip to sales, while in small-ticket projects, there is a fillip of about 30%,” said Om Ahuja, chief executive (residential services), Jones Lang LaSalle India, a property consulting firm.
Siddharth Bhatia, head of marketing at Wadhwa Group, adds that such schemes are introduced only when a project under construction has made some headway in terms of securing necessary clearances so that banks have certain sense of comfort in lending for the project.
Bharat Dhuppar, the chief marketing officer at Mumbai-based Omkar Realtors and Developers, said that the scheme in its current form is finding favour with customers because it eases the burden on their pockets and customers can enjoy the benefit of property appreciation by investing lesser than what they would have to otherwise.
For developers, the only benefit is in attracting more customers to buy houses in their projects, says Dhuppar. In the earlier scheme where banks would disburse funds to the developer upfront, real estate developers were able to secure the money at a fixed rate of interest, but with payments being made construction-linked, the rate of interest that the developer has to pay is floating and, hence, volatile.
Omkar is offering this scheme on demand, for its Alta Monte residential project in the western suburbs of Malad in Mumbai.
Bangalore-based Puravankara Projects has tweaked the 75:25 scheme for its Purva Manhattan condominium project in Chennai in a manner where the customer pays only 25% of the property price upfront and the remaining funds can be tied up for loan once the projects reaches the possession stage.
“The 25% paid by the customer takes care of the project cost and frees them from the worry of paying installments till the possession stage,” says Jackbastian Nazareth, group chief executive officer of Puravankara Projects.
Additionally, Puravankara is also offering an interest subvention scheme to boost sales. It started a scheme two weeks ago on all its projects under which customer will pay 6.99% interest on their loan, while the remaining 3.50% will be paid by the developer for 24 months. According to Puravankara, the offer can potentially help customers save upto 7.02% of interest costs on their home loan.