Soft launch

Tags: Real Estate

Investing in soft-launched or pre-launched projects is all about taking high risk, for good returns in a short period. It can pay off as long as you have factored in all possible variables

Soft launch
It is a season of pre-launch offers. Much before the formal launch of real estate projects, developers draw interested parties from their inner circle of brokers and investors through social media or word of mouth, promising substantial discounts to the market rate. Developers, to enhance their initial cash flow, are increasingly banking on pre-launched offers these days because of restricted fund availability. In the absence of bank funding, they are forced to shell out very high interest rates for the limited availability of funds through other sources. For consumers, it’s time to do proper due diligence before investing in such properties.

Unitech, DLF, Godrej Properties, L&T Realty, Indiabulls, Ultra Homes, Sattva Group and Lodha Group are among the developers who are actively pursuing this model.

In most cases, such information will not be available on companys’ websites, primarily because the project may still be awaiting some approvals. The news generally spreads by word of mouth and via email and SMSes. The kind of buyers who show interest for pre-launched projects are usually opportunistic investors and end-users who seek to benefit from the price advantage and can wait for a couple of years before getting possession of their flats. It is a clear trade-off – huge risk for the fabulous discount that the developer offers.

Not only Mumbai, but other cities are also focusing on pre-launch offers and are witnessing equally good response. Godrej Properties, which recently soft launched two projects in Gurgaon and Bangalore, has witnessed strong sales. “We had soft launch of two projects – Godrej Summit in Gurgaon and Godrej Gold County in Bangalore. We sold total stock of one million sq ft at Godrej Summit in 24 hours with booking value of Rs 600 crore,” Pirojsha Godrej, managing director, Godrej Properties, told FC Build.

Around 37 per cent of the launched stock of 82,000 sq ft at Godrej Gold County was sold during the pre-launch. Godrej Properties recorded booking area of 30,555 sq ft and booking value of Rs 21 crore in this project, said Godrej.

Delhi-based developer Unitech is offering a discount of around Rs 500 per sq ft as pre-launch offer at Unitech Exquisite, in Noida. Tarun Jain, marketing head of Unitech, said, “We are offering it at Rs 4,250 per sq ft as a combined pre-launch and festival offer.” Unitech Exquisite is a luxury residential apartment project offering three bedrooms plus a servant quarter.

Rajeev Talwar, executive director, DLF, said the developers are opting soft launch of their projects mainly to improve their cash flow.

According to Ganesh Vasudevan, vice-president, India Property.com, almost all projects in Delhi have pre-launch offers. “These offers have lot of advantages and risks. Advantages are that you get the property at a slightly lower rate and longer period to pay, so financing is easier. Risk is that the project may get delayed or stuck due to approval issues. So, the end-user should avoid booking flats at a pre-launch property.”

The trend is also catching up in the south. JC Sharma, managing director, Bangalore-based Sobha Developers, said, “Many developers are focusing on pre-launch offers to woo customers as they try to tap the opportunity during the festival season with most of the launches.”

Sharma said that at present the company does not have any pre-launch offers as it has not launched any new project during this festive season.

However, real estate experts have a word of caution for investors and say that they ought to be careful and do their due diligence before opting for pre-launch projects.

Vinod Sampat, advocate and president of Cooperative Societies’ Residents and Users Association, said, “There is no provision in the law that prior to clearance of the plan, a developer can launch a project. It’s illegal and developers across the country are doing it while the authorities are keeping quiet despite knowing the fact.”

OM Ahuja, chief executive officer, residential services, Jones Lang LaSalle India, says that regardless of the state of the economy, associated market sentiments and on-going funding trends, developers need to generate initial capital to successfully launch and complete their projects. “Only by doing so can they maintain the kind of churn that makes real estate development business profitable. However, lending to the real estate sector is in a low-sentiment phase at present. Interest rates are high for funding that is still available, and some developers do not meet the required eligibility norms for funding at all. In such circumstances, they may seek to raise interest-free capital from the market by pre-launching their projects,” says Ahuja.

Investing in pre-launched projects is a high-risk undertaking that can pay off as long as one has factored in all possible variables. It makes most sense to investors who have a high risk appetite and the ability to weather an eventual setback. Investing in pre-launches is, generally, not a route that end-users are advised to take unless there is a high degree of certainty implied in the builder’s brand and track record, Ahuja adds.

The price advantage of buying into a pre-launch project can be anything between 5-20 per cent, depending on various market factors. However, the high-risk factor must not be ignored. The project may not be cleared for home loan approvals, or the developer may not have obtained all the required permissions for the project. Also, the funds generated by pre-launching the project may not cover the total cost of construction and the project may be delayed or even shelved. Investors into pre-launched projects need to do a fair degree of due diligence before deciding to go ahead.

What the consumer needs to see is whether the builder has free and clear ownership of the land on which the project is being built. “An agreement between the builder and the original owner of the land is not sufficient. The project needs to have an IOD (intimation of disapproval). This is a set of instructions that a developer needs to comply with so that he can legally construct the project. IOD is valid for one year and needs to be reissued if the project has not been completed in a year’s time. The project also needs to have a commencement certificate in place,” says Ahuja.

While considering a pre-launch option, an investor needs to do a thorough check. “It is certainly necessary to establish the trustworthiness of the builder. This includes investigating his track record for transparent deals and compliance with legal formalities, his overall track record for timely project completions and the magnitude of experience he has had in the industry. Established builders with good reputations in the local market are generally safer bets, since they are able to bring in the necessary approvals and attract a healthier response from the market. The developer’s ability to complete the project depends at least partially on bringing in a certain critical mass of sales when he pre-launches a project,” says Pankaj Kapoor, chief executive officer at Liases Foras.

Shveta Jain, director, residential services, Cushman & Wakefield India, said, “Several projects are in the pre-launch stage and are likely to be launched in the coming months at higher prices revising the market benchmark upwards.”

So it is all about taking high risk, for some handsome returns in a short period.

jharnamazumdar@mydigitalfc.com

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