Investing in a pre-launch residential project

By: Om Ahuja, CEO – Residential Services, Jones Lang LaSalle India

Track2Realty: 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 the real estate development business profitable.

However, lending to the real estate sector is currently in a low-sentiment phase. 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.

A pre-launch (or ‘soft’ launch) is a situation where a developer apprises 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 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.

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 into a pre-launch project can be anything between 5-20%, 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:

• They must establish whether the builder has free and clear ownership of the land on which the project is being built. An agreement between builder and the original owner of the land is not sufficient.
• The project needs to have a 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. 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 also needs to have a commencement certificate in place.

While considering a pre-launch option, it is certainly necessary to establish the trustworthiness of the builder. This includes investigating his track record for transparent dealings 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 latter fact is important because 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.