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What are Property Exchange Schemes in the Indian Real Estate Market?

Editor, TRANSFIN.
Oct 23, 2020 6:25 AM 5 min read
Editorial

This is the front page advertisement appearing on major Indian English dailies over the past weekend. What are Property Swap Schemes in the Indian Real Estate Market?

“Exchange your stuck property with ready property” - what’s going on?

COVID-19 has brought a new real estate trend, with developers offering property swaps i.e. Allowing homebuyers to “swap” a stalled project they invested in for another piece of property that is finished or nearly-finished.

The scheme - which some firms have named “Mission Azadi” - began in July this year is currently being tried out mainly in the National Capital Region (NCR). Brokerages, consulting firms and developers such as Investors Clinic, M3M, Migsun Group, Supertech, Bhutani Group and Home and Soul are some of the firms that have begun rolling these barter options.

How do property swaps work?

Say there’s a buyer X. He invested ₹50L ($68,000) in a piece of property, say worth ₹1.5cr ($204,000) many years ago from a developer (Y), as booking charge. But the builder was unable to meet construction deadlines due to a variety of reasons - and then the project became indefinitely stalled due to the pandemic-induced lockdowns.

Now, the buyer has the option of restructuring his contract with developer Y. He can absolve himself from the above property (by giving it to another developer Z) and instead opt to purchase a ready-to-move-in house/commercial space worth say ₹2cr ($272,131) that he buys from Z. The ₹50L is adjusted in this process - X pays ₹2cr minus ₹50L he has already to Y. Usually, the property swap can occur as long as the buyer is ready to pay at least 70% of the price of the new property.

 

Is this a win-win situation?

Real estate firms think so. X is now no longer chained to a stalled project. Z records a new sale and new liquidity. And Y can buy back his property unit, restructure it while dealing with a Z rather than an individual (perhaps a better prospect when in financial distress) and revamp the construction process - and sell it at a later date for a higher price.

 

What’s with the 70% figure?

As mentioned above, buyers can purchase the new property for about 70% of its actual price.

When a homebuyer purchases a piece of property, they tend to pay a part of the total selling price to the developer when the deal is struck. This is usually 20-30% of the total amount. So when switching properties, the buyer would be required to pay only the remaining amount (~70%).

As for the new developer, things like marketing and brokerage tend to cost 30% of the total cost anyway. So if he can sell his finished property for about two-thirds of the full price without having to deal with marketing and brokers, it’s a win for him. Moreover, if the new developer can track down other buyers in the stalled project (if any), and convince them to jump ship too, he would be selling more of his units. 

 

But why barter properties at all?

In the NCR alone, about 200,000 housing projects have stagnated due to liquidity problems, labour unavailability or cartelisation of raw materials. The value of these stuck assets adds up to ₹82,200cr ($11bn).

Since the property swap scheme was rolled out, by one estimate, as much as 60% of real estate sales (commercial and residential) have been on account of it (again, in the NCR). Business worth ₹750cr ($102m) has been closed under the scheme so far.

There are plans now by some real estate firms to roll out the scheme elsewhere in the country, beginning with Mumbai.

 

COVID-19’s impact on the real estate sector

This property barter programme offers to be a saviour - at least to some extent - to India’s real estate sector. COVID-19 affected this sector in a unique way. On one hand, sales inadvertently plunged YoY - for housing projects, this number was 75%! But on the other hand, near-term trends are expected to be more positive, since the coronavirus has likely rekindled consumer desire in owning a house rather than renting one. Not only due to social distancing concerns, but also due to a growing work-from-home culture.

Having said that, the sector is struggling to get back on its feet. The lockdown saw labourers returning to their hometowns, raw material supply chains broken, liquidity dry up, banks becoming more reluctant to hand out loans, and the number of unfinished or delayed projects skyrocket. Additionally, you can’t “work from home” if you’re supposed to build a home.

But now, as the festive season approaches and the economy's engines slowly start humming again, the sector is gearing up with innovative ideas and freebies to attract buyers. These include conventional offers like cash discounts, lower interest rates, GST and stamp duty waivers - and not-so-conventional ones like property swap schemes.

 

But buyers beware

Now, trading your unfinished project for a ready-to-shift one for more or less the same price seems like a lucrative offer. But as with virtually everything in the real world, this comes to caveats.

For one, these schemes are framed in such a way that they suit those buyers who only paid c. 15% of the original project. That way, the new developer can get 85% of the total cost. For those who paid, say, 50-60% of the old project, the developer market is likely to be relatively muted.

Additionally, buyers should exercise caution and read all documents carefully before swapping. The unit cost for the new property may be jacked up. Completion and occupation certificates may be lacking. There may be hidden costs that will force the buyer to cough up more money. Or the new project may also be a stagnated one, leading the buyer to be fooled twice consecutively.

As always, read the fine print, play safe, and aim high!

FIN.

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