In the next three posts on this blog, I will attempt to weigh the pros and cons of the three buying categories or options available to you as an investor, namely, soft launch, hard launch and resale. In this post, I will attempt to evaluate the advantages and disadvantages of soft launch.
Soft launch (also known as “pre-sales”)
Developers are permitted to start sales of their projects once they receive a license from the authorities to start work on the project. However, often times, developers start offering inventory through a soft launch rather than go in for a "big bang" hard launch. The reason for opting for a soft launch may be to evaluate the response from the market and some times developers choose the soft launch route since they may not yet have tied up the required capital to execute the project. They, therefore, rely on pre-sales to raise part of the capital required to execute the project. Let us evaluate the advantages and disadvantages of soft launch offers:
Advantages:
1. Normally offered at 10-15% discount to the hard launch price. The actual discount offered depends on the market conditions and reputation of the developer.
2. If you are a HNI and are able to commit significant capital (eg. Buy 10% of total inventory available with the developer), it may be possible to negotiate the discount further, the payment plan and location of apartments, etc.
Disadvantages:
1. A soft launch may go through several stages (before the hard launch) depending on how much capital the developer wants to raise. Stage 1 (when discount offered is highest) is normally open to select HNI’s. Being on that select list requires being well connected in the industry through well established brokers and the investment community. If the developer is not able to sell the required number of units in Stage 1, he may decide to extend the offer to a larger number of people (through the mass broking community). At Stage 2, the discount offered is likely to be lower than Stage 1.
2. If the developer is not able to generate enough interest in the project (despite soft launch efforts) and raise the required amount of capital, he may have to delay the project. This could result in your investment made in Stage 1 or 2 lying idle for an extended period. Unless pre agreed (only possible in stage 1 to HNI’s), no compensation will be available while project is delayed.
3. The effective discount is less than promised. If the market conditions are not favorable, the hard launch price may be lower than was originally assumed by the developer. Therefore, as an investor if your objective was to enter at soft launch and exit at hard launch (60 -120 days), making a neat profit in the process, you could be in for a surprise. The actual hard launch price would depend on the market conditions and response to the soft launch. Do your own analysis of what profit you may be able to realize at hard launch. Do not ONLY rely on the advise of your broker or take the word of the developer at face value. To make the promised or expected profit, you may have to wait longer thereby reducing your return (the longer it takes to realize the profit the lesser the return).
4. Complete or exhaustive information may not be available at soft launch stage to make an informed decision eg. Will you end up paying a Preferential location charge (PLC) at time of allotment which you were not expecting, will you have to buy two car parks which you were not prepared for, etc.?
Questions you must ask before buying in soft launch:
1. Look beyond the headlines! Don’t just look at the psf rate to make your buying decision. This could be misleading. At the outset, atleast ask the following questions:
a.Is the development approved for availing a home loan and ask names of banks
that are extending home loans?
b.What is the total size of the development? Remember-the more the number of units in the development, the longer the soft launch is likely to last. This in turn impacts the hard launch date and therefore delays your time to exit (if that is indeed the intention) at a profit.
c.Know the payment plan (you don’t want to be surprised with demands for future payments)
d.Ask for layout plans of the development
e.Make sure to enquire about any hidden costs eg. Will you end up paying a Preferential location charge (PLC) at time of allotment which you were not expecting, will you have to buy two car parks instead of one that you were prepared for, check out if there are other costs such as External Development Charges (EDC), Infrastructure Development Charges (IDC), EEC and FFC charges (Developers in Faridabad have started charging this), electrical charges, club charges, etc.
f.Maintenance charges-I personally feel this cost to become very significant part of home ownership in India. Currently, charges vary between Rs.1.5-Rs.6 psf (depending on development) but could be rising at 6% p.a. or more.
2. Are you getting the apartment in Stage-I of soft launch or have the prices already been increased and the apartment is now available in Stage-II of soft launch? This is important since this will help determine the potential upside at time of hard launch.
3. What percentage of units have already been sold?
4. When is the hard launch expected?
5. When is construction expected to start?
6. Is there a lock in period before the soft launch apartment can be sold? Some developers may impose a 3-12 month lock in period before you are able to sell your apartment in the resale market.
In summary, soft launch may be enticing (especially with brokers trying to convince you this being a once in a lifetime offer ) but not always attractive. Having said that, some soft launch offers are genuinely attractive because the developer is reputed, the price is right and all necessary information is available to make an informed decision. As long as this holds true, you may be in for making a neat profit in a relatively short period of time. To keep it simple, just follow the first rule of investing - know your product well and ask questions. If you are comfortable with the answers you get, go ahead and commit capital. On the flip side, be careful, since you may not always get what you see.
If you have questions about specific offerings, please feel free write or post a comment. In the next post, I will evaluate hard launch offers.
Happy investing.
Later,
Ashish
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