Unitech, once India's largest developer, has plunged to a fraction of its previous valuation

Highlights Falling property sales have left many companies grappling with debt

Home sales have plunged to a seven-year low

Property prices dropped 3% on average in top 6 cities, says Knight Frank

Amit Khulve, a 34-year-old resident of the north Indian city of Noida, is still paying off the mortgage on an apartment he's never lived in.The sales executive says he borrowed about Rs 5 lakh in 2012 and pulled another Rs 10 lakh from his savings to reserve a flat in a building planned by the property developer Unitech Ltd. Six years on, the project hasn't been built, and he's among hundreds fighting to recover their investments. Unitech's founders have been jailed on charges of cheating, which they deny. The Supreme Court in the coming months will review ways to protect the company's homebuyers and consider the founders' request for bail.Across the metropolitan area that surrounds Delhi, a string of real-estate developers including Unitech, Jaypee Infratech Ltd. and Amrapali Group have been dragged to court by irate homeowners who shelled out payments for apartments that have yet to be completed. Many of these firms took money from a stream of buyers. As sales slumped and the once red-hot market cooled, their businesses unraveled -- leaving them grappling with debt.The fallouts from the shakeup in the $126 billion property market are reverberating across companies, markets and the broader economy. Unitech, once India's largest developer, has plunged to a fraction of its previous valuation. Jaypee is in insolvency court. State-owned banks -- the lifeblood of the economy -- are grappling with a pile up of bad loans from the industry. Indian families, who have long poured their life savings into real estate, are now pulling back."Even projects that are compliant with the new rules are unable to find takers," said Ramakant Rai, a partner at Trilegal, a law firm representing some of the buyers suing developers. "Erosion of trust in the builder community appears to be a primary driver for the meltdown in the real-estate sector in India."Home sales have plunged to a seven-year low and prices in some of India's biggest cities are tumbling, in stark contrast to booming property markets elsewhere in Asia.The homebuilders deny any wrongdoing in court filings and statements, and contend constructions were postponed for reasons beyond their control.Even so, the industry's troubles have significantly impacted the economy. That's because real estate and construction are a substantial portion of GDP and major sources of employment, according to Samantak Das, Mumbai-based chief economist at the consultancy Knight Frank LLP. "Real estate is no more the sought after investment avenue," Das said.Homebuyers in India have been particularly vulnerable because they've historically had few laws to protect them. Families have faced the most delays around the National Capital Region, or the cluster of cities around Delhi. Firms there ended up highly leveraged after accumulating too much land and borrowing at very high costs, according to Ashutosh Limaye, India head of research at the real-estate services firm Jones Lang LaSalle Inc.Indian real-estate businesses expanded as long as firms were able to draw new buyers for planned projects. But as the economy slowed and demand softened, many firms were left short of cash and struggling to manage their debt. The downturn only worsened last year after the government tightened regulations to protect homebuyers and separately introduced a new services tax across all industries. India's residential sector appears to have shrunk to a fraction of its size in less than a decade, according to Shishir Baijal, managing director of Knight Frank India.Prices dropped 3 percent on average across the top six cities, according to Knight Frank, with some declining as much as 15 percent after accounting for developer discounts. And in the capital region, last year's prices were 9 percent below their 2015 peak. The outlook remains bleak."We can begin to see initiation of recovery in second half of 2018, not recovery," said Das. "Recovery will take much more time."To add to builders' woes, the courts seem to be siding with the homebuyers. In 2016, responding to a complaint by one group over delays in Unitech's residential project in Gurugram, southwest of New Delhi, the country's top consumer court, called the National Consumer Disputes Redressal Commission, ordered Unitech to complete the project and to compensate buyers by paying 12 percent interest on their investments.Justice V.K. Jain of the consumer disputes commission, in his May 2016 verdict, noted that the legal agreements between builders and home buyers were skewed in favor of developers, encouraging the diversion of homebuyers' money. Unitech is challenging that verdict in the Supreme Court.In a bail hearing, the jailed Unitech founders, Sanjay Chandra and his brother Ajay, assured the court they would deliver the flats or repay consumers, and in court arguments their lawyers have denied any criminal behavior. The company and lawyers for its founders didn't respond to requests for comment.Jaypee isn't facing a criminal case, but India's attorney general in November called for a financial audit of the business after homebuyers alleged that Jaypee had diverted funds.Jaypee didn't divert any money to other projects and its accounts were fully audited, said Ajit Kumar, an advisor. He said delays in delivering the apartments were caused by labor shortages and regulatory setbacks due to its project's proximity to a bird sanctuary. The firm started 'massive' construction last May and will hand over about 5,000 apartments by March, Kumar said, adding that the company hopes to bounce back within a year's time.Some of Amrapali's group companies are facing insolvency proceedings, and the group's lawyers have assured India's top court that the firm will deliver apartments it has committed to. The company couldn't be reached.The property developers are adding to a pile-up of bad loans in India's banking sector, which is already struggling to manage a spike in stressed assets across several industries.The government has stepped in to regulate the real-estate industry with new laws, including one that forces developers to use at least 70 percent of sale proceeds to complete residential projects, rather than funnel money to different jobs. Other measures prevent them from pre-selling apartments before all building approvals are obtained. The changes may wipe out thousands of small developers who can't comply, according to property consultancy Liases Foras Real Estate Rating & Research Pvt.The pain hasn't been restricted to the North. Mumbai last year witnessed a decline in residential property prices for the first time in a decade.Bhavesh Jain, an information technology professional living in the U.K., bought an apartment in Mumbai's Lower Parel area from Orbit Corp., a Mumbai-based developer of high-end apartments. He says he booked the apartment in 2010 by paying a 30 percent down payment on a Rs 2.6 crore home.The builder ran out of funds to build the flat and now financial institutions have made claims on some of these apartments as collateral for money Orbit owes them.Orbit expects to conclude discussions with lenders and home buyers by March about resuming construction on six stalled residential projects in Mumbai, Chief Executive Officer Pujit Aggarwal said in a phone interview. Aggarwal, who was jailed last year on allegations of cheating and misappropriation of funds, is now out on bail. He denies the allegations.

Aggarwal's bail application filed in July last year said that there had been no intention to cheat buyers and Orbit's project had been delayed due to circumstances beyond its control. His company has filed affidavits in court to show that its accounting is transparent and no money had been siphoned off, he said.Still, Jain, the homebuyer, says he doesn't know when he will see his apartment or the money he invested. "I'm not going to touch any other property in India," he said. "I'll look to buy in the U.K. now."