Real estate developers are known for various marketing tricks to attract buyers. Some offer free cars with luxury apartments, some air-conditioners, gold coins, while a few offer discounts to market rates.
But, one recent advertisement by the Pune-based DSK Group, for their select projects in Pune and Mumbai, instantly caught the attention of both prospective home buyers and competition. The DSK scheme, announced in a tie up with Tata Capital, offered flats for customers with a loan facility from the financier at almost zero rate of interest.
Under the scheme, the buyer of a one bedroom flat can finish the repayment of his Rs 50.7 lakh loan flat in eight years. He needs to just pay the initial contribution of Rs 10.04 lakh (20 percent of property cost) and repay the rest in equated monthly installments (EMIs) of Rs 40,160, while DSK has promised to pay the interest component to Tata Capital on behalf of the customer. In other words, the customer needs to pay only the principal value of the property to own his flat.
For a home loan aspirant, the scheme should be appealing. If the same loan is taken for 20 years under a regular plan, say at an interest rate of 9.5 percent at an EMI of Rs 37,710 for 20 years, the customer ends up paying almost the double value of property taking into account the interest burden on him. In the DSK offer, the customer is practically paying only the flat cost, with almost same EMI amount.
The question here is does this mark the beginning of a trend-setting, innovative housing offer in the Indian home loan market or is it just a gimmick?
According to a section of real estate analysts, the whole idea behind the DSK scheme is to avail quick, cheaper liquidity to develop their projects. Typically developers get loans from commercial banks at a higher rate of 13-14 percent, while individual buyers get loans at about 9-10 percent.
“It’s a win-win situation for the developer and the buyer. For the developer, it is an easy way to mobilize cheaper funds. For the buyer too, the scheme makes sense since he doesn’t need to bear the interest cost,” said the analyst with a Mumbai-based brokerage, who didn’t want to be named.
But not all share this opinion. Senior banking industry officials are critical of the scheme saying there is an unseen risk involved in this scheme for the customer. “In case the builder defaults on the interest payment at any stage, the customer will have to bear an unexpected financial burden. This is a risk for the consumer,” said Pratip Chaudhury, former chairman of State Bank of India.
Replying to an email query, DSK officials said the company will compensate Tata Capital on the interest component. “We can’t put every detail in advertisements… each and every detail is explained to the buyer at the time of booking openly and transparently. DSK developers will compensate Tata Capital with respect to the interest component ,” the email response said.
Tata Capital, in an email response said: “To help cater to the needs of discerning home buyers, Tata Capital Housing Finance Limited (TCHFL) works closely with developers to offer innovative financing options to its customers across various home buying segments,” the company said in an emailed statement. “TCHLF’s products are in full compliance with the necessary guidelines,” the company said.
Under the DSK scheme, the customer who pays his initial contribution (say Rs 10 lakh or 20 percent of the total value of Rs 50.7 lakh), will have to immediately start paying the EMI (about Rs 40,000). The possession of the flats will be given in 2019.
Poor demand hurting the sector
The Indian real estate market is passing through a phase of slowdown hit by poor demand, mainly due to high real estate prices and overall economic slowdown in the economy. Builders often find it difficult to sell flats, leading to inventory pile up and cash-flow issues.
Deepak Parekh, Chairman of India’s largest mortgage lender, Housing Development Finance Corporation Ltd, said the zero-interest schemes like DSK’s are smart marketing tools developers use to find buyers in a lackluster market.
"This is one marketing tool developers are using to attract the buyer by offering to pay interest on behalf of the customer. The customer in such cases, where full interest is being paid by the developer, will not get tax benefit on interest payment on such loans since the customer is not paying any interest and hence the tax benefit will be limited to the principal repayment," Parekh said.
But, DSK officials said the customer will get full home loan tax benefit, including that on the interest component on the loan.
Real estate experts and bankers say there is a possibility of developers inflating the property prices in such schemes. “In such schemes, partly interest component is built into the property price and partly because financier is offering subsidy,” said Pranay Vakil, founder and former co-chairman of global property research and brokerage firm Knight Frank India.
For instance, DSK is offering flats at around Rs 6,000 per square feet in the DSK Vishwa project, located in Dhayari area of Pune. According to a few Pune-based real estate agents Firstpost spoke to, the current property rates in the Dhayari area is in the range of Rs 4,500-Rs 5,000. None of them wanted to be identified.
“The prices in the area, where this scheme (DSK) is offered are much less. Almost the entire interest component for the eight year period or even more than that amount is built into the prices. Since the possession will be given after 3-4 years, this money can come handy for the builder to build a corpus,” said a Pune-based real estate agent.
(Data support from Kishor Kadam)