Wednesday, February 27, 2013

Arun Excello- My lessons in Real Estate- Moneylife article

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 Chennai’s 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 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 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 buyer’s 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 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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