Loans to the real estate sector from banks and housing finance companies have been on the decline for some time now, given their risky nature. Lenders are staying away from this sector, even at the cost of their margins. In such a situation, real estate developers are looking to raise interest-free capital from the market by pre-launching their projects, said a report by real estate consultancy firm, Jones Lang LaSelle, India.
V K Sharma, Director and Chief Executive, LIC Housing Finance, said that while demand for loans in the retail segment continues to be robust, the company is cautious in its lending to the developer segment. It is impacting our net interest margins, he added.
According to the JLL report, a pre-launch (or 'soft' launch) is a situation where a developer informs an inner circle of brokers and investors of the availability of properties in a project that has not been officially put on the market yet. Word of such an arrangement spreads by word of mouth and via email, but does not figure on the developer's website or in other marketing media. The kind of buyers who show interest for pre-launch projects are usually 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.
Om Ahuja, CEO-residential Services, JLL said, "Investing in pre-launched projects is a high-risk undertaking which 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 speaking, 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."
The price advantage of buying a property at the pre-launch stage can be anything between 5-20%, depending on various market factors.
However, buyers must keep in mind that the project may not have received all required approvals or may not be cleared for home loan approvals by lenders.
Another risk is that the project may be delayed or even shelved, in case the developer is not able to raise sufficient funds. Therefore, those investing in pre-launched projects must check for the following before going ahead:
* They must establish whether the builder has free and clear ownership of the land on which the project is being built.
* The project must have an Intimation of Disapproval (IOD), which is a set of instructions that a developer must comply with so that he can legally construct the building. The 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 must have a commencement certificate in place.
According to Ahuja, while considering a pre-launch option, it is necessary to investigate the builder's track record for transparent dealings and compliance with legal formalities, overall track record for timely project completions and the experience he has in the industry. "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," he said.
