Thursday, April 18, 2013

Pre Launch Property - Shall I go for it or not?

Author: Sachin Gupta | Find me on Twitter
  • What is a pre-launch offer?
These days, we are all accustomed to getting pesky SMS and emails about pre-launch offers of builder projects in India. What are pre-launches? Well, as the name suggests, these are projects launched by builders before the official launch of a realty project. Pre-Launch projects are usually launched by the builders to generate demand and assess market acceptability of their project.

  • What allures customers to pre-launches?
As explained earlier, pre-launch projects are launched by builders to see market reaction for their project and therefore are priced below the launch price and also below the current price prevailing in the market for other similar projects. That’s the catch, this only attracts buyers (should we just say investors or flippers) to pre-launches wherein buyer/investor hopes to make decent amount when the project is launched officially at a higher price point.

  • What are the risks attached with pre-launches?
Some of the risks attached with pre-launches are:
  1. The builder may back out of the project due to financial constraints.
  2. For pre-launch projects, the approvals from relevant authorities have yet not been obtained and therefore there is a risk of official launch getting delayed or in some cases the competent authority may altogether reject the project proposal.
  3. The market may not value the project as expected by the developer and therefore the project launch price may not be as high as expected by the investor. In that scenario, relatively lower gains are offset by the selling costs, transfer charges, etc.
  4. Pre-launches are illegal in nature. As per the norms in certain states, a builder is not authorized to sell any part of the project before officially getting all approvals.

  • Why do builders go for pre-launch of a project?
Well, there are in-numerous reasons for builders to go for the illegal yet prevalent practice of pre-launching of their projects. Real estate is a capital intensive and risky business and regardless of the state of the economy, inflation, prevailing interest rates in the market, market pulse, and funding trends, real estate developers need to generate initial capital to successfully launch and complete a project. And as we see these days, lending to real estate sector by formal financial channels such as banks, private equity, and bond market is in decline and therefore developers need to raise initial corpus of money and they do so by pre-launching their project to their cozy circle of brokers and investors. And in most cases, this cozy circle fall prey to these offers in order to realize quick returns. Needless to say, the returns realized are in form of cash and those cash returns are again ploughed back into other real estate projects or pre-launches and the whole circle keeps on turning.

  • Are all builders pre-launching their projects or there are some exceptions to the rule?
Recently, a reputed developer with interest in other consumer businesses such as body care, furniture, consumer electronics, etc, declared in the media that they have been able to sell all of about 600 housing units of their new project in Gurgaon in a single day. Interacting with service professionals gives one the feeling that they could have done so because of their brand and perceived ability to deliver what is being promised. However, the truth lies elsewhere; the very same project was being promoted by this reputed developer within their cozy circle of brokers and investors for about 5-6 months before the official launch. The developer himself did not put anything related to the project on website or in any other marketing media. The project was promoted by this cozy circle of brokers and investors by word of mouth and email medium. And needless to say, our press covered it as a success story.

  • In a nutshell, is this a good or bad practice?
For investors or flippers, with high risk appetite, it gives them the opportunity to realize substantial returns on relatively small portion of their equity (after all, they book the property with about 10% of the total property value).

For end-users, the pre-launches are highly risky and they need to conduct the property due diligence and verify lots of things such as IOD, CC, and Clear land title before going in with the flow.

As far as, the practice of pre-launch is concerned, the big developers with their previous track record and reputation in the market can successfully bring in necessary approvals and not default on their promise of officially launching the project. However, some of the other developers may not be able to do the same. Therefore, it puts the onus on big developers to lead the way with fair processes and practices for the entire industry and safeguard the consumer interest first.

Have any Questions?