Under Construction

Paying mortgage for a home that is still under construction?

Recently I considered investing in GIFT City, so I started looking into it. What was so interesting, were the offers being made by developers, with some of them willing to pay interest to investors instead of Banks. 

Reasons for that are understandable, since Indian banks can charge interests around 16 - 20% for Business loans, and for developers raising money from shady people, those rates can go anywhere around and above 30%. 

So a promise to pay 12% interest sounds very attractive, especially when home loans cost anywhere between 8 - 10%. Wise investor would say to themselves, how about we take out a mortgage and make the margin on interest payments. 

The challenge is that, the developers are often not trust worthy, especially when you have paid them up front, in an economic climate where supply outstrips demand. Often such projects are riddled with delays, so not only do you forgo getting your property in time, but also the interest payments. 

Recently such shady practices have emerged in Delhi NCR region, where developers have wooed buyers in issuing mortgages, with a promise to deliver their property in stipulated time. What happened in those cases is that money raised was siphoned to other projects by developers, instead of completing the project itself. 

Why is this happening? Reason is simple, developers face maximum cost at the end of the project, when they install fixtures such as windows, doors, bathrooms, painting and other amenities. Instead developers choose to complete scaffold and link the completion of scaffold to payments from buyers.

This way they raise huge capital, which they use to build another scaffold to raise further capital for other projects, instead of completing the previous ones, for which their capital has already been extinguished. 

Similarly such shady practices are evident not only in Delhi, but in other metros such as Mumbai, Bangalore. These practices are to stay, as slump in demand and huge supply of inventory, is just making situation worse. 

What are the chances that GIFT city will survive and developers operating at GIFT city, be immune to such scrupulous practices. Would the developers engaged in GIFT city project be willing to build credibility and accountability around their projects, or are they like most other developers rotating capital and doing shady practices. 

How much I would like to believe that GIFT city is immune to that, the reality remains that there is a huge surplus of space already available and very few potential tenants who are planing to move in. With many more projects getting ready the space availability is just going to be on a rise. 

Will this city manage to attract people to move in these spaces, as investors hope? Will there be appreciation in real estate in a city which is half done, and not populated? Will there only be investments in real estate but not in actual businesses operating from these spaces?

These questions raises concern at the same time hope, that investors will soon realize that investing in tangible assets such as real estate, make good financial sense, but will be unproductive if one doesn't invest in businesses and people who are going to be living and working in those spaces.