Are risks in soft launches worth low prices?

Recently, a well-known New Delhi-based real estate firm went for a soft launch, or pre-launch, of its residential project at Gurgaon’s Dwarka Expressway at Rs. 4,350 per sq. ft. In other words, the project hasn’t been advertised yet but select investors/buyers have been apprised about it through the developer’s network of brokers and given an offer at lower rates.

The project has attracted many investors and end-users, who would have had to shell out up to Rs. 5,500 per sq. ft for a similar project in the same area.
For developers, soft launches are an opportunity to attract a large bunch of investors. But the low prices shouldn’t blind you to the risks that soft launches come with.
Says Anand Naraynan, national director, Knight Frank India Pvt. Ltd, a property consultant firm, “This is definitely not a good idea when there is no regulation over the practice. But since returns are higher when you invest at the time of launch this has become a national trend.”
The risks
Incomplete paperwork/approvals: At the soft launch stage, developers may not have the paperwork complete and permissions in place.
Says a Delhi-based resident, who booked in a project on the Noida Expressway at the soft launch stage, “I didn’t know at the time of booking that some approvals were not in place. Luckily, for me those issues have been sorted out, but what if they hadn’t been?” He didn’t want to be named himself or name the project.
At the time of soft launch, many builders do not disclose entire details such as map, land acquisition details and building layouts. So you put your money without even knowing the project’s details. “Often these investments are done on the basis of the developer’s track record. In many cases, builders do not give enough details on the project,” says another Gurgaon-based broker, who did not want to be named.
No regulation: What is worrying is there is no regulation in place in case something actually went wrong in the above-mentioned case.
At present, there is a no regulation that governs the practice of soft launch. It is for this reason that the draft Real Estate (Regulation and Development) Bill, 2011, has proposed that no promoter would be allowed to advertise about the project without obtaining complete permissions from the authority. Also, the draft says that the promoter will have to furnish all the details related to project, including sanctions and approvals.
Says Samarjit Singh, managing director, India Homes Pvt. Ltd, a pan-India brokerage firm, “State authorities and the government do not have any laws governing soft launches. However, people invest in such projects only to get lower rates. When the project’s construction advances, there is a decent appreciation in the property value.” As a brokerage firm, India Homes does not endorse investments at the soft launch stage.
“You will get the allotment only at a later stage. Companies usually show the receiving (initial booking amount) as proceeds taken in favour of a future project,” says Ajay Singhal, director, Avlon Group, a New Delhi-based real estate firm with projects in Bhiwadi and Dharuhera. Avlon Group does not follow the malpractice of soft launches in its projects.
No initial allotment: It is usually seen that developers take some initial deposit from brokers and end-users through cheques and book a flat without giving any allotment or flat number. Once the project is officially announced “open for all”, these initial buyers are considered first. At this stage, they are allotted flat numbers.
After these initial bookings, the company takes fresh bookings for the remaining inventory of unsold flats. The resident we spoke to has a similar story, “I got my tower and unit number only around the time my home loan was processed, not at the time of the initial booking. At that stage, it was just a piece of paper.”
Moreover, the developer may assure you at the beginning that your preference will be considered, that may not happen at the time of booking when the rush and pressure increases. Adds Singhal, “You may give a preference of a flat on the second floor but you may get something on the fourth or fifth floor. Your developer may give the same flat to someone else who has given a larger lump sum or asked for less discount.”
Risk of delay: Since there is no grievance redressal mechanism in terms of loss due to delay, you may get stuck. Therefore, your investments could be a risky one. “Only investors and deep-pocketed brokers have the capacity to absorb such risks arising out of a delay in projects,” says Ashutosh Limaye, head-research and real estate intelligence services, Jones Lang LaSalle India, an international property consultant firm.
Despite the risks, data shows that soft launches are pretty popular and investors jump at them. Data from Noida-based brokerage firm, Investor’s Clinic, corroborates the trend that soft launch has been a practice in the Indian real estate market. Mint has independently confirmed the trend. This clearly shows that there is little knowledge or realization about the associated risks among investors and buyers. So are these risks worth the low prices? We would say no. Go for it only if you can check each approval and permission of the project before booking, which may be practically difficult to find out since these offers are open for very short periods—about 10 days or so. Our advice: stay away from soft launches.

(http://www.livemint.com/2012/06/12192447/Are-risks-in-soft-launches-wor.html)