Adv Aysha Sahla K P, Senior Associate, Alishahz Legal LLP
Property development is known as a particularly lucrative area of the real estate industry, whereas they face many problems, especially made evident during the COVID lockdown and the restrictions imposed thereon. The booming real estate sector has been impacted to a great extent all over the world. Nonetheless, there was still optimism among the market players, which had bought the construction industry into an exciting phase, which in turn led to a propulsion growth in the industry. Despite this potential for growth, multiple challenges continue to hover in the construction industry and the developers still face many hurdles and challenges at the same time. While some of these challenges are relatively new and others are as old as the industry itself. I have curated a list of some of the typical challenges that plague land development projects.
FINDING RAW LAND
What is the most important factor when it comes to the business of property development? Land, of course! As the builder faces the dilemma of going for a land purchase till handover of the property, finding and acquiring the right land is the first step in the real estate development. It is important to seek proper legal advice for conducting due diligence to ensure the land is free from any legal encumbrances. Another problem that might arise is that the area of development might be unsuitable in other ways. There may be environmental issues, zoning problems, or issues with competition regarding the purchase of land, so you must be smart about the market which will give you deep insights about the demand for development in the chosen area. Furthermore, negotiating the price and other terms with the seller of the land can be riskier than you anticipate and risk in delaying the negotiation process can end into losing the land to a competitor.
APPROVALS AND PERMITS
A crucial step in the development, particularly early on, is to obtain plan approval from the concerned authorities and the difficulty in obtaining them can be exacerbated by several other factors. While getting the proper approvals and permits can be a straightforward process, there is always the risk that it will take significantly longer than expected or that the approvals and permits won’t be granted at all. To curtail the occurrence of this particular hurdle, developers should start the permit and approval process early on and communicate effectively with the local department.
FUNDING AND COST OVERRUNS
Funding for real estate projects can be obtained through multiple routes such as banks, non-banking financial institutions, quasi debt-equity transactions such as REITs or via external commercial borrowings. It may be a while before your raw land begins generating its own cash as the development process take time and you must make sure that you are prepared for the “in-between” stages by accurately calculating the costs associated with raw land. Even though, real estate development can be highly lucrative, profits can quickly erode due to cost overruns once the construction begins. From fluctuating labor and material costs to unexpected snags and changing rules and regulations, anticipated budget can be blown. Also, there can be losses caused by design errors which can far exceed the expected cost limits which means the developer could end up bearing a devastating loss if it is a significant project. Another potential risk since the RERA came into force is the developer will now have to deposit 70% of the proceeds in a separate account, which can only be used for the earmarked project which greatly affects the short-term liquidity of the developers. Altogether, it’s helpful to have strong analytical and research skills and network-building capabilities to aid with funding.
CONSTRUCTION
Construction delays are a common occurrence, and they happen for a myriad of reasons. Choosing the right people at the commencement stage of the construction process will ensure getting the most out of the investment in the final stage. From the delivery of materials to circumstances beyond your control, can be contributing factors to project delays and added extra costs; they can range from logistical, environmental, economic, etc. to other related factors. For example, late delivery of important materials can threaten the timeline of the project. However, it is not necessarily disastrous if you have accounted for cost overruns as the construction work nearly always cost more than you anticipate.
MARKETING
The final step in the real estate development is marketing. Marketing is a complex task for real estate property developers, but it’s one you can tackle with the right marketing strategy. Researching the neighborhood, the market price, and demand will pay off when determining your marketing strategy because disorganized marketing can be almost as bad as no marketing at all. However, it can be exceedingly challenging if you do not delegate your marketing efforts to a broader marketing team, either under a project manager or better to contract an agency to handle your marketing initiatives. Lastly, it’s a fact that most property developers hardly have their own social media team, despite the need for a strong online presence as you will quickly build the buyer recognition.
THE BOTTOM LINE
While real estate projects have proven to be a highly rewarding business, developers continue to face numerous challenges from the beginning till the very end. Even though there is a good demand for real estate projects, several hurdles and challenges are driving the projects into non-feasible corners. Also, the government always play an important role in the development of this sector of the economy, for example, the government should try to reduce these tax rates on the real estate sector to facilitate its growth as it can contribute tremendously to the economy. Thus, the most successful real estate developers are the ones who know how to acknowledge, plan for, and reduce the risks, which may be anticipated, and which may also be unforeseen.