Buying a new Flat in Bangalore ? 8 Points to Check Out

12 Sep

Real estate in Bangalore has given excellent returns since 2000. And with Acche Din promised the near future looks bright. If you buy at pre launch from a good builder at a good location, chances are that you can see  75 – 100% appreciation in 4 – 5 years. However given the lack of regulation and rules the journey can be frustrating and challenging at times. Here are some pointers that you need to be aware of.

Let me start with a real life case. I booked a flight in Nov 2010 with a premium builder ( top 3 in Bangalore). It was a good location – on the main road, a metro station was supposed to open 100m away and a large Mall was also planned adjacent to the complex. The rate at Rs 3100/sft (pre launch) was great and with a staggered payment over  30 months and possession in Oct 2013 – it sounded like a great deal.

elevation

I am yet to get possession but I still think its a great deal – my investment has appreciated almost 100% , the flats are now selling at ~ Rs 6000/-sft and I am sure that in the next few years this will become 8 – 9000/-sft. But not everyone who bought at a later date are singing happy tunes. Lets look at some of the challenges of buyers in large complexes with 2000 – 3000 flats.

1. Density of Population 

This complex spread across 15 acres will have about 3000 flats. On an average 4 people / flat i.e. 12,000 people in 14 acres.

1 Sq Km = 247 Acres. So 14 Acres = 0.05 Sq Km. With 12,000 people in 0.05 Sq Km that would make it one of the most densest complexes in the country or the world. I did not do this math when I bought my flat. Initially the builder had promised large flats , later there were more 2 BHK and the no of floors went from 18 – 20 – 25 floors adding more flats and people.

Be mentally prepared for this – what you see in your prelaunch brochure is indicative and not the final.

2. Scale of Investment 

The first flat was sold for Rs 3000/- sft , the last one at Rs 6000/-sft . lets take the median price as Rs 4500/- sft. Flat sizes vary from 1200 – 2500 sft , again lets take the average size of a flat as ~ 1500 sft . Across 3000 flats the total super built up area sold is 4.5 million Sft. At Rs 4500/- sft the revenue earned by the builder is Rs 20250 Mn – 2025 Crores (337.5 Mn Dollars)

Thats a colossal investment – something that would make ET headlines – and we see at least 3 – 4 such projects getting launched in Bangalore every year. A company running this investment needs to have accountability/checks and balances /some Government control thru a regulator – sadly most of this doesn’t exist.

Even a vegetable trader make a 20% margin in Business – chances ares that the real estate majors make 3o – 40% margin , thats a 750 Crore profiit from a project of this size. Now you know why builders and politicians are best buddies.

3. Advance Payment 

This builder like many others had a Pre EMI scheme and collected the money  100% advance from many  gullible buyers. Others got a 10% discount for paying upfront. All this is great if the project is completed in the committed time. However in most cases the project delays are from 1 – 3 years. (Bangalore is better – in Delhi the delays can be 5 years +) How leading Banks like HDFC /Axis, SBI  entertain a scheme like this is baffling – but they do. The builder normally struggles to get a loan from a financial institution – by this scheme he conveniently funded himself 2000 Crores at a very low cost of funds . As the project gets delayed he has the seed money to fund other projects. So what if there is a delay here – the buyers have no choice.  I was lucky to be in Phase – 1 and my project is delayed by 15 – 18 months. But think of the people who bought in Phase 2 and 24 months after paying 100% money are yet to see the excavation work start. Not a happy feeling.

Learning – Never pay a Builder 100% advance, always pay as per structural progress, avoid the Pre EMI scheme which looks so attractive.

4. Structural Modifications 

Be prepared to see modifications. The brochure always says indicative drawings. What changes most commonly are two things

a) Roof height comes down to accommodate more floors ( from 11 – 12 feet ceiling height 10 years back they are down to 9 feet these days)

b) What are shown as stand alone buildings get merged. A stand alone multi-storeyed building needs two staircases from a fire escape ruling. By communing multiple building in one long wall like structure you can eliminate 1 staircase / building and save sft to build more flats. yes its cramped and results in less sunlight but who cares . The blocks are not connected internally and the only fire escape solutions is from the roof of one block to the other.

5. Contract & Undivided Share of Land 

The contracts are always one sided. You just have to sign on the dotted line. Most contracts do not even mention the undivided share of the land that is due to you. This is because the developer doesn’t know on day 1 how many flats will be built, what will be their size. In large projects the building comes in phases and the design and size of the flats vary basis demand and market conditions.

So what happens is that at the time of registration you get land based on the Plinth area of the building. The total Plinth area of all the buildings is normally not even 50% of the total complex area. Who owns the balance land ? The Builder doesn’t – since he is a developer. The land is always owned by a 3rd party. What if the land owner at a later date comes and stake claim ? Difficult to find answers to such simple logical questions.

The contract mentions a nominal delay penalty  (3 – 5 Rs / sft / Month) – thats less than Rs 7500/- for a 2500 sft flat. Even that is not paid on the 1st month of delay – but the builder says he will pay in final settlement. At the same time the contract does have a clause on cost escalation which the builder can invoke anytime.

6. Club House and Common amenities 

As the building develops the size and facilities of common amenities continue to shrink. rarely will you get the promised glamorous club house at the time of possession ( delayed possession) – the Club House will happen slowly as other phases construction starts. So in a 14 acre project – when you get your Phase – 1 flat , there is construction work and noise all around you for the next 5 years.

3000 Flats , 12,000 residents – have to make do with 1 swimming pool , 1 tennis court and 1 TT table. Thats what you have even in a 200 flat apartment complex. Get ready to reserve your play slot 1 week in advance.

7. Maintenance 

Most builders maintain the complex for the 1st 3 years. Post that they hand over to the community. I shudder to think how it will be to form a  management Committee in a  complex of 12,000 Indians. We struggle to get one going in a complex of 124 flats. How will one treasurer collect the monthly maintenance ? What if people don’t pay ? Are there large established 3rd party companies that can maintain complex of this with SLA’s.

8. How to protest 

Its almost impossible for the buyers to get together and stage a strong protest. For starters nobody knows his neighbour. Even if you get a Yahoo Group started – there is a lot of noise but little action. Leadership is a rare quality in India. Everyone is scared of getting over aggressive – the builder can always hold back your registration or penalise you with the worst parking lot.  Filing a case or going to the consumer court to protest is not an option – unless you are a very high profile buyer with strong connections (One Bangalore West) – so you just pray and wait. CREDAI , State Government , Builder Regulator , Agencies giving FAA ratings , Banks – all are not a partner to help you – they are all agencies just in name.

But inspire of all this people still flock to buy flats. With the top 3 builders you know that even if you get 80% of what was promised with a  2 year delay – you are still on a hot property with decent appreciation and a good community. So you are OK to look the other side and forget the pain and agony.

My only suggestion is – maybe we should be careful of the mega projects and look for complexes in the 250 – 500 flats range. Less complexity, faster completion, easier to maintain.

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