‘Prelaunch schemes must be abol­ished’

The risks in­volved with prelaunch schemes in­clude ap­proval de­lays, prod­uct-mix changes or project can­cel­la­tion at worst

HT Estates - - HTESTATES - Su­vishesh Val­san

Pre- sales of res­i­den­tial units is a widely fol­lowed prac­tice across the globe. How­ever, in In­dia, de­vel­op­ers go a step fur­ther, of­fer­ing units for sale at a prelaunch stage. Dur­ing prelaunch, de­vel­op­ers of­fer in­vestors an op­por­tu­nity to pur­chase res­i­den­tial units ahead of even procur­ing all nec­es­sary ap­provals.

At times, land ti­tle due dili­gence or prod­uct- mix ( re­tail, res­i­den­tial, com­mer­cial) con­sid­er­a­tions may still be un­der­way. Dur­ing prelaunch, de­vel­op­ers ap­prise an in­ner cir­cle of bro­kers/in­vestors that a prop­erty not of­fi­cially launched in the mar­ket is avail­able for sale. While one imag­ines the news spreads through word-of-mouth or email, re­cently we have seen prelaunch an­nounce­ments made on pub­lic hoard­ings and in news­pa­pers.

For de­vel­op­ers, prelaunch pro­vides funds, which could be used for part-pay­ment of land (or to ac­quire another piece of land) or for meet­ing ap­provals -re­lated costs (which in In­dia are usu­ally higher). Also, de­vel­op­ers ben­e­fit through test-mar­ket­ing a project be­fore spend­ing time, ef­fort and re­sources on ap­provals, due dili­gence and con­struc­tion. De­vel­op­ers ex­pect to sell 15-20% of units dur­ing prelaunch.

For in­vestors, prelaunch pro­vides an up­per hand in terms of apart­ment choice as well as price dis­count. Mar­ket ob­ser­va­tion sug­gests prelaunch in­vestors could earn a dis­count of about 15% over the base price at the start of con­struc­tion. In re­cent years, in­vestors have en­joyed healthy re­turns by hold­ing from prelaunch un­til com­ple­tion ( usu­ally three to four years), con­sid­er­ing that over the past four years, the price of res­i­den­tial units panIn­dia in­creased by over 50% on av­er­age. The risks in­volved is re­lated to ap­proval de­lays, prod­uct-mix changes or project can­cel­la­tion at worst.

In June 2013, In­dia’s Group of Min­is­ters (the union cab­i­net) ap­proved the Real Es­tate Reg­u­la­tory Bill, which pro­hibits res­i­den­tial unit sales by de­vel­op­ers prior to ob­tain­ing all ap­provals. Though still not ap­proved by the par­lia­ment, the Bill has aroused de­bate about the vi­a­bil­ity of de­vel­op­ers’ cur­rent busi­ness prac­tices and the Bill’s likely im­pact on land cost and hous­ing af­ford­abil­ity.

The In­dian cen­tral bank pro- hi­bits fund­ing for land pur­chases to avoid land hoard­ing, and prelaunch was an al­ter­na­tive fund­ing mech­a­nism for de­vel­op­ers. Thus, in its cur­rent form, would the Bill cre­ate fund­ing con­straints for In­dian de­vel­op­ers?

Let’s look at China as a com­par­i­son. The prac­tice of prelaunch does not ex­ist in China and banks are pro­hib­ited from mak­ing loans for the pur­chase of land use rights. How­ever, cap­i­tal mar­kets in China are highly liq­uid and de­vel­op­ers have many sources of fund­ing in­clud­ing the cor­po­rate bond mar­ket on­shore and in Hong Kong, project-level eq­uity joint ven­tures with do­mes­tic or for­eign funds and in­sti­tu­tions, as well as lend­ing from trusts and other non-bank fi­nan­cial in­ter­me­di­aries.

In China, the gov­ern­ment is typ­i­cally re­spon­si­ble for land ac­qui­si­tion, re­ha­bil­i­ta­tion and re­set­tle­ment, while de­vel­op­ers pur­chase land from gov­ern­ment with clear ti­tle. Since the land ti­tle is clear, de­vel­op­ers can mort­gage their land to ac­quire ad­di­tional funds for con­struc­tion work. In In­dia, how­ever, de­vel­op­ers are re­spon­si­ble for land ac­qui­si­tion and re­ha­bil­i­ta­tion, caus­ing de­lays, ma­nip­u­la­tions and lit­i­ga­tions.

Prelaunch leads to in­for­ma­tion asym­me­try and, t hus, should be abol­ished. Si­mul­ta­ne­ously, there is a need to pro­vide prac­ti­cal so­lu­tions to the gen­uine fund­ing needs of de­vel­op­ers. Ei­ther the bank fund­ing chan­nel needs to openup, or a bet­ter mar­ket en­vi­ron­ment must pre­vail to at­tract more pri­vate in­vestors. The au­thor is se­nior man­ager - re­search, Jones Lang LaSalle In­dia


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