Developers are offering a variety of payment schemes, to attract buyers during the current slowdown. For example, subvention schemes have been prevalent for quite some time in the residential sector and are being used by developers, to market their product more effectively. 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.
However, it is imperative for buyers to understand what each plan entails, based on their individual income and liquidity positions (both present and future). The attraction of plans that offer delayed payments, no EMIs, etc., has to be viewed in conjunction with the restrictions, such as inability to sell the property within a short period, or before construction is completed.
The most widely seen payment plans on offer:
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. Such arrangements tend to lock in the buyer, till possession of the apartment – they cannot exit their investment in the interim period.
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 still has to pay the EMIs at a later date on 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, with higher or lower upfront payment by the buyer. Higher upfront payment will allow for a better price per sq ft but will cause short-term liquidity constraints for the buyer.
This is a variant of the subvention payment plan, where the buyer pays 10% initially, 80% within 30-45 days of the loan amount approval and the remaining 10% on possession. It is essentially the same as the 20:80 plan and is a direct arrangement between the developer and bank. It ties the buyer to the project, till possession. It is helpful for end-user buyers, as it saves them the pre-EMI.
Problems can occur, if the developer stops paying the pre-EMIs and the burden falls on the buyer.
Fewer banks now offer subvention schemes. Moreover, they are now being structured, such that the payments to the developer are made according to the project’s construction progress.
Also, the price on a per sq ft basis is higher under these schemes, compared to the conventional construction-linked plans.
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 live on rent, as it will help them to avoid a double pay-out of rent and interest on their loan. However, since these plans are linked directly to the developers’ arrangements with banks, it 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 at a later date. This allows an investor a better exit option, compared to subvention schemes, as there is no tripartite agreement. Moreover, buyers can engage with a bank of their choice. Also, buyers who can pay a higher booking amount, can obtain a bank loan a little later, closer to the project’s completion. Although this allows greater flexibility for exiting, it can cause short-term liquidity issues.
Real estate systematic investment plan (SIP)
This is a recent, new variant that is being seen in the market, for mid-segment housing projects. 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 Rs 60-80 lakhs category, where it is easier to structure such moderate monthly payments.
Discounts and freebies
Additional freebies that may be offered, include direct discounts on the basic selling price (between 8% and 18%), time-bound price discounts (inaugural, festive season, first 50 bookings with a fixed amount of 5-10% reduced from the basic selling price, etc.,) waiver of floor rise charges, 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 a higher value. The value of such discounts/freebies, is in proportion to the average ticket size of an apartment, which varies across projects.
(The writer is associate director – research and REIS, JLL India)