In an unregulated industry, the need of the hour is to have a credible, third party evaluation of real estate projects to assure the customer before he decides to take a plunge. The evaluation must be holistic and closely look at every possible aspect of a realty venture.
Leaking roofs or damp walls are not what a buyer bargains for while paying a premium price for his dream home. But it is near impossible for him to gauge the quality of an under-construction project while making the purchase.
However, he does not need to worry on this count if the project has been rated by a third party, which will assess the brick and mortar structure in detail to ensure that it is not only fit but also matches the specifications shared with the buyer like structural quality, infrastructure quality, technology and design used, integrated facilities offered, pre- and after-sales services, warranties, etc. A project gets a tick mark in the quality of construction box only if all the commitments are met.
Buyers often do not read the fine print in agreements to spot the devil lurking in the detail. Even if they do, lack of understanding of legalese prevents them from identifying the pitfalls which make the agreements loaded in favour of the developer, leaving the buyer out in the cold. Despite verbal assurances from the developer, a buyer may find himself at a disadvantage if there is a dispute.
There have been instances of a buyer being denied a partial refund for delay in handing over property, or of agreements which do not even have an exit clause for a customer who changes his mind after paying the advance. Also, a buyer is often not sure about the papers and clearances he needs to seek from the developer and is satisfied by the assurance that the project has been approved by a housing finance company or a bank.
While the financiers do their own due diligence, having another credible agency look at the documents could add to the comfort of the buyer. This will ensure that all the paperwork is in order. A third-party will evaluate the legal quality of the project on the basis of clarity of title, encumbrances in land if any, various covenants in the sale agreement and development agreements.
Delay in completion
Many real estate projects suffer from delay in completion, impacting the first-time buyer adversely who has to shoulder the dual burden of paying rent as well as equated monthly instalments (EMIs) till the time he stays in a rented accommodation. Even a six-month delay can stretch an investor thin if he has not factored in the extra rent he has to shell out.
A rating regime with project completion as a key parameter will ensure that developers strictly adhere to the timeframe committed to the customer.
Assessing the developer
As part of the mandate, a rating agency will carry out a detailed assessment of the developer so that a buyer does not fall prey to a fly-by-night operator.
The financial quality of the project is also taken into account by a stringent evaluation of the accounting quality, project viability and the financial flexibility of the project. At the same time, it will also speak to the sponsor or the funding source for the project to understand his financial strength.
Many developers do not upload either all the relevant documents of a project or provide regular updates on the status of under-construction projects on their websites. Regular status updates will be appreciated not only by the evaluator but also by the customers.
Developers themselves are probably realising the importance of getting their projects rated since a third party assessment helps them differentiate their offerings in terms of enhanced transparency and best practices. These two factors are critical to the development of the real estate market and beneficial to both the buyer as well as the developer.
— The author is Senior Director, CRISIL Ratings