Real estate: Soft launches can lead to a hard landing

Dec 14 2013, 14:44 IST
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Home buyers are flocking towards 'pre-launch' schemes, unaware that the risks are greater than the discounts dangled before them. Home buyers are flocking towards 'pre-launch' schemes, unaware that the risks are greater than the discounts dangled before them.
SummaryCash-strapped developers are resorting to pre-launch sales to lure buyers with discounted prices.

With the festival season turning lacklustre and with the RBI clampdown on 80:20 payment schemes and its variants, a good number of developers are increasingly opting for ‘pre-launch’ to lure buyers and to get their cash flows going. There is even a fancy name to this called ‘soft launch’. Home buyers are flocking towards such schemes, unaware that the risks are greater than the discounts dangled before them. Legal experts term this ‘illegal’ while property consultants advise buyers to stay away from them.

The Carrot

Under this scheme, the developer discounts the price by as much as 10-20 per cent of the prevailing rate in the locality. This is usually communicated, before work begins, through a network of brokers and old clients for a limited number of units and for a limited period.

Buyers who book by giving a token sum of around 10-20 per cent of the total cost are given a receipt, and not an agreement for sale. At most it can take the form of ‘Expression of Interest’. Buyers are given the impression that it is a special discount, and a price rise is imminent once the official launch takes place. End-users feel they have landed a good deal, while investors believe they can plan their exit at a handsome profit.

“Pre-launch offers are illegal. There is no provision in law that the developer can launch the project before obtaining approvals. However, developers both small and big across the country are using this method,” says Vinod Sampat, a Mumbai-based advocate and a real estate expert.

The Reality

The ‘scheme’ is just a fund-raising tactic for the developer. There are cases where developers do not even own the land but go ahead with pre-launch. There are some developers who have made a down-payment for the land, and will pay off the balance through collections from these buyers.

“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 project,” says Om Ahuja, CEO-Residential Services, Jones Lang LaSalle India.

Then there are others who own land, but have no approvals. Such developers open the pre-launch window to pile up as much capital as possible. They then close the offer and raise prices to make good the

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