Rohan Sharma, JLL India
Developers are offering a variety of payment schemes to attract buyers during the current period when home sales have been slack. It is imperative that based on their individual income bands and liquidity positions (both present and future) they understand what each payment plan entails. The attraction of delayed payments, no EMIs, etc. has to be viewed in conjunction with the restrictions such as inability to sell the property within a shorter investment period, or before construction is completed.
Subvention schemes have been prevalent for quite some time in the residential sector and some concerns were raised by the RBI for this practice in the early days. However, a middle ground seems to have been found as such schemes have become the norm and are being used by developers to market their product more effectively. Also, in times of focus on the trust deficit between the buyers and developers, such plans reduce the financial burden on the buyer and provide a sense that a developer is fairly confident of delivering his project within stipulated timelines keeping his financial commitments in mind.
Such options are likely to be beneficial for end-users, but there is a need to understand the actual fund outflow under such plans compared to the conventional home purchase plans.
The most widely seen payment plans on offer are outlined below:
- 20:80 Subvention Plan
Developers ask for 20% upfront payment from the buyer/investor and arrange the remaining 80% loan amount through their own arrangement with banks, resulting in a tripartite agreement between the two aforementioned parties and the buyer.
Usually under this scheme, developers get the amount directly from the banks and pay the pre-EMIs on behalf of the buyers. The pre-EMI is only the interest component payable on the disbursed amount. The actual EMI starts on possession of the apartment. Usually, such arrangements tend to lock in the buyer till possession of the apartment – they cannot exit their investment in the interim. This is on account of the ongoing arrangement with the developer and the agreement, which usually bars transfer during the construction phase. Also, the pre-EMIs do not lower the actual loan component for the buyer, who has still to pay the EMIs at a later date upon the entire loan amount. Under this scheme, the per sq ft price is also higher for the buyer as the developer has already factored in the cost of the pre-EMIs he is going to bear on the buyer’s behalf.
There are variants of this plan in the form of higher or lower upfront payment by the buyer and the remainder from the bank loan arrangement. Higher upfront payment will allow for a better price per sq ft but will cause short-term liquidity constraints for the buyer.
- 10:80:10 Plan
This is a variant of the subvention payment plan, where the buyer pays 10% initially, 80% within 30-45 days of loan amount approval and the remaining 10% on possession. It is essentially same as the 20:80 plan, and is a direct arrangement between the developer and bank, and ties in the buyer to the project till possession. It is helpful for end-user buyers, as it saves them the pre-EMI pay-out. Problems can occur if the developer stops paying the pre-EMIs and the burden falls on the buyer.
Subvention Schemes are usually being undertaken by lesser number of banks and are now being structured to tie in payments to the developer in line with his project’s construction progress. Also, the price on a per sq ft basis is higher under these schemes compared to the conventional construction-linked plan.
- Possession-Linked Plan
All possession-liked plans are essentially a variation of the payment plans described above, and tend to tie the investors to the project for a longer period. Also, the level of price discounts available in such schemes is lower when compared to regular construction-linked or down payment plans. In absolute terms, the buyer is still paying the entire amount of his EMI as per his loan amount, as the principal amount does not reduce till the actual EMIs begin. (It must be remembered that pre EMIs are just payments of interest on the disbursed amount which the developer pays on behalf of the buyer.)
All of the above mentioned plans can help buyers who save on rent. They will hence save themselves a double pay-out of both rent and interest on their disbursed loan amount. However, since these plans are linked directly to the developers’ arrangements with banks, it is makes exit difficult for those who are considering investment and intend to sell off before the project is completed.
- Standard – Deferred Payment Plan
A simpler arrangement entails paying a slightly higher booking amount (around 30%); the buyer/investor obtains the remaining loan amount from the bank himself at a later date. This allows an investor a better exit option, compared to subvention schemes as there is no tripartite agreement and can engage with a bank of his choice while buyers who can come up with the initial higher booking amount could get a bank loan at a convenient time of after 2-3 years, closer to the project’s completion, as the amount is to be paid on possession. This allows greater flexibility for exiting, though is more ‘upfront-payment’ prone and can cause short-term liquidity issues.
- Real Estate Systematic Investment Plan
A recent new variant being seen in the market for mid-segment housing projects is popularly categorised as Real Estate Systematic Investment Plan. Under this plan, the developer creates the house purchase payments in the form of a SIP, where at the beginning of each year the buyer pays a lumpsum amount and the rest is converted to monthly equated payments similar to SIPs. This model is usually for buyers who do not want to take a home loan and are confident of their paying capacity in such a flexible monthly form. This plan, however is being seen for projects which fall in the INR 60-80 lakhs category as creating moderate monthly payments is easier to structure.
- Discounts and Freebies
Additional freebies likely to be on offer include direct discounts on Basic Selling Price (between 8-18%), time-bound price discounts (inaugural, festive season, first 50 bookings with a fixed amount of 5-10% reduced from the Basic Selling Price) waiver of floor rise, waiver of stamp duty and registration charges, rental payments to the buyer capped to a certain limit for a specific period of time or till possession, electronic appliances, consumer goods, fully-fitted kitchens, gold coins, holiday packages and cars. In certain cases, developers are also offering an extra apartment in another project of theirs, if the buyer chooses an apartment of higher value. These freebies translate into discounts over the actual transaction value of an apartment purchase and act as additional benefits to attract buyers. The value of such discounts is in proportion of the average ticket size of an apartment, which varies across different range of projects.