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Will real estate cos. pay for their deeds? - Views on News from Equitymaster

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Will real estate cos. pay for their deeds?

Sep 6, 2011

Anti-competitive practices watchdog Competition Commission of India (CCI) has imposed a penalty on DLF, India's largest real estate developer, for abuse of market dominance and unfair trade practices. CCI found DLF guilty of commencing the project without proper approvals, increasing the number of floors mid-way, excessive delay in project completion and forfeiture of booking amount upon any cancellations. The penalty amount of Rs 6.4 bn equates to 7% of DLF's average annual revenues over the last three years.

It is true that the purchase agreements between builders and buyers are skewed towards the former. This is primarily attributable to prevailing demand-supply gap and rising real estate prices. In the past, except during the economic downturn, real estate prices in India have surged by 15%-20% every year. Hence buyers were willing to book flats at all conditions in the fear of price escalation. Moreover, buyers were fooled by builders through false claims of overbooking and artificially created demand-supply gap. The real estate sector in India is, indeed, notorious for lack of transparency.

We believe that the CCI verdict will affect other realty companies as well, as the unfair practices are not confined to DLF. CCI has already started investigating many big builders in the National Capital region (NCR).

The real estate companies are united against the verdict and claims that these purchase agreements are prepared after proper evaluation by lawyers and Housing Finance companies.

In case the verdict stands unchanged in the higher courts, it will require a lot of rejig in the current and new agreements. The real estate companies will have to book huge penalties or provisions on their income statement, which will affect their profitability. It will also trim some of the unethical practices followed by developers to generate revenues.

We agree that there will be a long legal battle before any conclusion can be drawn. Nevertheless, real estate stocks are likely to remain volatile as speculators may react extremely to such news.

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