Non-Resident Indians usually plan for the future and for them getting in early in a project is vital
* If you are going to a good branded developer, the risk is mitigated in a short span of time as soon as the permissions come in.
The Pre-Launch Story
Getting into a project at the pre-launch stage can offer tremendous benefits to the investor, says SANDEEP SADH, who explains how it works.
The Mumbai property market is always buzzing with some activity or the other. The focus now has clearly shifted from ‘under- construction’ homes to ‘pre-launches’ for both the home buyer and the investor. From the buyers’/investors’ perspective, they see dual arbitrage opportunities in the Pre-launch and the Launch, and the Launch and Completion. So effectively, there is a three-dimensional growth opportunity during the project cycle with a relaxed staggered payment outflow. On the other hand, for the developers it’s more pre-sales to the tune of selling of an inventory of upto 70% in pre-launch to launch stages. (See box on different launch stages.)
|Different Launch Stages||Rate PSF – Example|
|Market Rate/Current Rate of Location||10000/-|
|Structured Launch Rate||6000/-|
|Soft Launch – Pre Launch Rate||7000/-|
|Gain from Soft Launch – Till Completion||6000/- PSF –|
*Three-Year Project cycle, considering real estate market growth at a conservative 10% per annum on an average launch. Prices based on market trends.
The real estate market in today’s date and time is based on opportunities and with property prices being at an all-time high across each micro-market the arbitrage available is only in pre-launches as the returns after possession on an average seems to be diminishing and then it actually depends on the product developed and the micro- market.
If you look at the current property market and invest in today’s date and time in a project which is already launched and at advanced stages of construction, then your returns may be quite low and you may not realise the same returns viz a viz your investment in a pre-launch. If you are a homebuyer then there is no need to think any further to buy a home as that is more linked to your personal use than an immediate investment.
The trend of pre-launches is clearly dominant in the real estate circles in Mumbai Metropolitan Region as currently this is one of the only ways developers are getting traction and cash flows and at the same time investors and homebuyers are getting maximum returns in the lowest time frame.
|Developer||Location||Type of Launch||Launch Rate PSF and Year||Units Sold||Current Rate in April 2015|
|Kalpataru Ltd – Project Sunrise||Kolshet, Thane||Structured Launch||Rs.7500/-Dec 2013||600+||Rs.8500/-|
|Runwal Group – Project Runwal Forest||LBS Road, Kanjurmarg||Structured Launch||Rs.9900/-Jan 2014||400+||Rs.12500/-|
|Oberoi Realty Ltd – Project Eternia and Enigma||LBS Road, Mulund West||Soft Launch||Rs.12,250Jan 2015||400+||Rs.12750/-|
|K Hemani – Project Uptown||Kandivali East||Soft Launch||Rs.9400/-March 2015||200+||Rs.9700/-|
|ShapoorjiPallonji – Project – Vicinia||Powai||Soft Launch||Rs.12400/-March 2015||80+||Rs.12900/-|
Non Resident Indians usually plan for the future and for them getting in early in a project is vital. When any project is launched in Mumbai, the project is simultaneously launched in the international markets and developers send their teams to Dubai, Singapore, UK and USA to give presentations to clients for the launch.
Many investors and homebuyers are skeptical about pre-launches and they keep wondering why the price is so low and ask ‘Where is the catch?’. They also wonder why they should invest without proper permissions and documentation.
The truth here is ‘High Risk and High Gains’ with a general understanding of the real estate markets, launch price, incidental costs, developer reputations, market trends and infrastructure impact in a micro-location.
Let us decipher what are the different kinds of pre-launches — what they mean and the issues one can face while dealing with them.
There are typically three types of launch strategies in the real estate market currently:
- Air Launch/Structured Launch
- Soft Launch or Pre-Launch
- Formal Launch
Air Launch/Structured Launch
An Air/Structured Launch is when the developer buys the land or is allotted the land by Government or through the Slum Rehabilitation Authority (SRA), joint venture (JV) and so on. He does not have possession of the land, but an in-principle title of the land in his name. This is typically a case of redevelopment of a society or an SRA or an acquisition of a property with a corporate body.
In most cases, the developer signs with the society or buys the land from a landowner and is yet to apply to the government for basic plan approvals.
The developer here opens up the Air/Structured Launch either in chunks, for example, 5000 sq.ft.or more to its investors or retail. The investors pay up to anywhere from 30 to 50% of the value agreed upon of the property and sometimes with a pre-determined minimum guarantee of the interest.
This kind of structured launch is ideally for a bulk investor or a group of investors who come into the project at this nascent stage.
This is a high-risk investment as getting into a project where there are no approvals in place sometimes the delay is inevitable and indefinite, which could be a cause of concern. The developer counters the concerns by allowing an exit with refund of the amount with interest so the buyers feel assured at least of their refund of the investment with interest.
The returns here are pretty neat as the developer off-loads the investor stock in the form of retail sale when he is at the Soft Launch or Pre-Launch or Launch stage, depending on the stage the investor wants to exit. This launch is usually 40 to 50% below the market value.
A few developers in Mumbai use this to part-finance their project and at the same time investors are benefited with a higher upside. This is a High Risk and High Returns game played solely on the goodwill and track record of the Developer, the Location and ascertaining the Demand/Supply in the micro market and evaluating the deal signed by the Developer, be it in the Redevelopment or SRA.
Soft Launch or Pre-Launch
After the developer acquires the land he gets the plans approved and one of the permissions he receives is the IOD (Intimation of Disapproval) from the BMC or an equivalent Intimation. After the IOD the next important permission required for initiating work is “CC”, which is popularly known as “Commencement Certificate”. Only once the developer receives the commencement certificate, can he start the construction as this comes with approved plans. The time taken during this period could be a good six months or more, which is good for the market to align and appreciation to happen.
Usually, pre-launches are done between the interim period of receiving the final IOD or the CC. The CC in Mumbai comes in phases depending on the developer — say, up to the plinth or a particular floor.
During this period, the price of the project is around 25 to 30% lower than the market price. So let us say, if the surrounding location rate is around 10000 PSF, the pre-launch is usually successful in the range of Rs.7000 PSF to Rs.7500/-.
Most NRIs and HNIs prefer this, as this gives them a better rate at the beginning, gets them a choice of inventory, lower or higher floor depending on the views and topography around and of course the pre-launch rate.
For investors it is most important to get the right inventory on Day One and the Day One Price, as if he does not get the launch price and the good inventory like a lower floor facing the swimming pool or garden, or a higher floor with better views then the whole joy of getting into a pre-launch disappears as his profits are dependent to a great extent on the premium inventory.
The pre-launch comes typically with a 20% payment to be made in a span anywhere between one to three months, with the next payment usually to be made in the next six months. The next payments are all construction-linked in most cases, save and except going forward if there are any variations offered like a 25:75 or a 20:80 scheme.
This investment is relatively less risky, and if you are going to a good branded developer, the risk is mitigated in a short span of time as soon as the permissions come and you can easily exit in two to three years by getting a margin of around 20 to 30% on your invested amount of, say, 40 to 50%.
It is important to understand the exit loads and the lock-in period. The majority of builders in Mumbai allow the first transfer free or a nominal 1% or 2% charge of the consideration value or as mentioned otherwise.
This is the Eureka Moment, which an investor waits for, and this is the time when the builders’/developers’ commitments or estimations come to life. So typically, this launch is nearly 10% to 20% above the pre-launch prices. It is a full-scale launch with all legal permissions, media, ads, home loans and even structured inventory for the residual inventory. Sometimes, a new tower or higher floors are opened here at different rates, so this is the moment the investors who invested in structured launches or soft launches see the price appreciation.
We have seen that developers who sell very well at the pre-launch stage do not get into a formal launch because of the residual inventory, which is limited. For Example SD Corp launched a project named “Alpine” at Kandivali East in March 2013 and within a month they sold around 70% inventory and now they are left with nearly 20-odd flats to sell within two years—one of the classic examples where the investors have made more than 20% in price appreciation and they have paid not more than 30% till date. This means that they have got fabulous returns on their investment so far.
I have heard people saying, “There is No Emergency in the Real Estate Business so there should be no pressure on the buyer”, but I would like to continue my belief in the old adage ‘Opportunity knocks only once at your door’.
So if you are looking to invest in real estate and you have decided that you will look at a staggered payment approach where the payments have to be made in a good five years, then you must look at each and every launch seriously, else you will have enough coffee table discussions that you missed this launch or that launch and now the price has gone much higher.
Some facts on pre-launches
- Pre-Launches usually happen at least six to 12 months before the formal launch and statutory approvals.
- The buyer gets a price advantage of anywhere between 20 & 30% in the launch price and sometimes, with some more sops of floor rise waiver or inclusion of car parking.
- Prices between Pre-Launch and Launch move up anywhere from 10 – 20% depending on the project size, developer and location.
- Buyers outflow remains to be in the range between 20% to 30%.
- A staggered payment approach gives the home buyer enough time to pay the total consideration value.
A Pre-Launch Checklist
- Developer reputation
- Location of the project
- Current rates in the Location
- Opening price
- Floor rise
- Preferential location charges
- Know the topography of the plot and directions
- Competition in the micro market
- General infrastructure in the location
- Any USP
- Watch out for infrastructure charges and development charges
- Car parking charges
- Exit option with or without transfer fees
- Lock-in period.