Why your property may get pricier

In the sales agreement, companies are adding an escalation clause to offset increasing costs and protect margins.

If you have booked a flat and are still awaiting its possession, watch out for the cost-escalation clause in the property agreement.

Real estate companies are tweaking business strategies to build in the clause, besides working on faster project execution and timely deliveries as a measure to improve margins.

As the fourth quarter of the current fiscal was a mixed tiding with both the top lines and the bottom lines of most listed realtors nosediving in the wake of high borrowing costs and low demand, companies say such a clause will help them bite the cost bullet.

‘conserving cash'

“We are closely watching the economic conditions and our launches will be according to market and micro-market development. Our key business strategy will focus on conserving cash and protecting margins through cost-escalation clauses,” Mr Saurabh Chawla, Executive Vice-President, Finance, DLF, said during an analyst presentation.

DLF said that the economic and business environment will remain challenging for the next few quarters and hence the company shall continue to be focused on high visibility projects (plotted development and luxury/premium housing to improve the cash cycle), timely execution and delivery of its projects, certain strategic divestments of assets and cash conservation.

Another listed player, Omaxe Ltd, said currently it did not have an in-built escalation clause.

However, the company may look at it if the inflationary trends prevail. “The fiscal year 2011-12 was challenging due to high inflation and high interest rates still prevalent in the economy.

Demand continued to be robust in tier-2 and -3 cities like Ludhiana, Indore, Lucknow and New Chandigarh. We continue to focus on completion and delivery of projects,” Mr Rohtas Goel, CMD, Omaxe Ltd, said.

Third-party contracts

Parsvnath Developers said its concentrating on faster execution to offer possession quickly.

The company said it has also signed third-party contracts with leading construction companies such as L&T and IL&FS to execute quickly and deliver timely the ongoing projects. It has has signed two contracts with IL&FS Engineering & Construction Co. Ltd.

Mr Pradeep Jain, Chairman, Parsvnath Developers, said, “Financial year 2011-12 has been very challenging for us, primarily due to the increasing cost of material, funding and then the unavailability of funds for real estate sector.

This has affected our business adversely both in terms of top line and the bottom line of our results. We have also been affected adversely by the rollback of income-tax exemption by the Central Government on affordable housing projects.”

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