This festival season, mid-sized developers are betting their last penny on the 20:80 scheme to beat the slowdown in the real estate business. The scheme, also known as the ‘subvention scheme’, is emerging as a popular marketing tool, as the buyer has to pay only 20 per cent upfront, while the remaining 80 per cent is paid at the time of possession.

Interest subvention schemes are a modified form of financing home loans and have been part of residential real estate over the last few years.

Under this scheme, a buyer of an ‘under construction’ piece of property is not required to pay monthly EMIs for a defined time-frame, or until he takes possession.

In pockets such as Delhi-NCR, Bangalore and Navi Mumbai, where demand for residential space is slowing, developers are opting for this scheme to attract buyers.

Adequate liquidity

For cash-strapped developers, the 20 per cent upfront payment gives them adequate liquidity. And there is pressure to execute the project quickly. The remaining 80 per cent is funded by the bank, which creates a bipartite escrow account that keeps disbursing the funds as the project progresses. Such schemes are popular in the Rs 25-65 lakh segment.

“In our opinion, it is not a good scheme for developers as there is pressure to execute the project fast. But it is highly favourable for consumers as they can expect a saving of Rs 2-3 lakh on interest cost,” Kumar Bharat, Director, BCC Infrastructures, Bharat City, said.

Mid-priced segment

The company has such a scheme in the mid-priced segment. Such players as Indiabulls in Gurgaon and Nirmal Lifestyle are also offering such schemes.

Property service firm DTZ points that eight to ten banks have forayed into the subvention scheme. “Till recently, the facility was largely provided by NBFCs such as Indiabulls Finance, DHFL, etc. However, a few banks have now forayed into subvention scheme plans,” it said

Samarjit Singh, MD, Indiahomes, a property broking firm points out that at least 200 developers across the country are taking advantage of the scheme.

Tie-up with banks

“A lot depends on the developer’s tie-up with banks and financial institutions. If the developer has a good credit history, banks fund the project. Also, banks restrain their exposure to Grade A properties and reputed developers,” he said.

However, not all developers are keen on the scheme. “There is an element of uncertainty as not all projects get completed on time. To mitigate such risks, developers offer the scheme only when at least 20 per cent of the project is completed,” Ravi Saund, COO, CHD Developers said.

A Jones Lang LaSalle report notes that the Indian residential property market is behaving like a pendulum.

Sale velocity has been rising and falling over the last two or three quarters, and capital values are going up because of increased input costs.

(This article was published in the Business Line print edition dated September 23, 2012)
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