In this post, I will attempt to weigh the pros and cons of buying an apartment in a hard launch. This is a continuation of my post of 7th July,08 in which I had evaluated the pros and cons of buying in a soft launch.
Hard launch
In robust economic times, developers normally skip the soft launch stage and go straight for the hard launch. In not so good times (like we are experiencing currently in RE markets across India), developers normally go through a soft launch before going for a big bang hard launch-to learn more about a soft launch, read my previous post. Let’s evaluate the advantages and disadvantages of a hard launch.
Advantages:
1. At the stage of hard launch, developers mostly have financing tied up for the project. This is good from an investor’s perspective since it reduces chances of project delays for lack of capital. Needless to say, the project could still get delayed due to other reasons.
2. Detailed information about the project is available at hard launch stage. This is in contrast to information scarcity at soft launch stage. As an investor, more information is always better than less information.
Disadvantages:
1. Depending on the developer and the project, a hard launch may be preceded by one or more soft launch promotions. If you missed the opportunity to invest at soft launch stage, hard launch prices are unlikely to give you an upside in the short to medium term. Infact, at the time of hard launch, a lot of short term investors may be seeking an exit (also read my previous post on soft launch). This could depress the price of the project (since at time of hard launch, investors who invested in soft launch are trying to exit and so is the developer trying to sell inventory) in the resale market. I will dwell on resale market at length in my next post.
Questions you must ask before buying in hard launch:
1. Check with your broker if the hard launch was preceded by a soft launch. If it was, then you need to find out if there is a lock in period for soft launch investors before they offload their apartments in the resale market. Tip: If there is no lock in for soft launch investors you may find a better price for the same apartment type in the resale market.
2. RE brokers such as www.axiomestates.com, www.atoneplace.com, etc. promote new options through property fairs overseas. These brokers could earn anywhere between 3-5% commission from the developers for apartments sold through soft launch and hard launch. Don’t be shy and negotiate with your broker. Ask him or her to share a part of the brokerage with you. Tip: Brokers will typically retain 1%-1.5% and pass the rest back to investors.
3. Check prices for comparable developments in the neighborhood. Sometimes apartments in the resale market (same project or similar development in the vicinity) can be had for a 10-25% discount to prices being offered in a new launch or hard launch. Tip: In the resale market you may have to cough up a higher amount upfront (since building was launched earlier and some payments have already been made) which could increase your interest cost as compared to hard launch. Do the math carefully.
4. Look beyond the headlines! Don’t just look at the psf rate to make your buying decision. This could be misleading. Therefore, you need to ask at least 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 it will take the developer to offload the inventory. This will reduce the developers ability to increase prices and therefore your chances to exit at a profit (if that indeed is the intention).
c. Know the payment plan (you don’t want to be surprised with unanticipated 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.
5. What percentage of units have already been sold?
6. When is construction expected to start?
In summary, hard launch offers may be attractive under robust market conditions when absorption capacity of the markets is high. However, under the current market conditions (July,2008) I would analyze every offer with a fine toothed comb. In most metro markets, there are attractively priced opportunities available in the resale market. Tip: Evaluate resale options which are farthest away from possession since the discount on such properties is likely to be highest I current market conditions. eg. Some under construction projects on Sohna Road in Gurgaon. Having said that, some hard 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 actually be getting a better deal than the resale market.
In the next post, I will evaluate the pros & cons of buying in the resale market.
More later,
Ashish
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2 comments:
Ashish, it was interesting visiting your site and some useful information on scope of property in NCR. I agree with your observation with regard to highend properties not finding enough buyers going forward. your emphasis on the fine print while booking a flat is useful. Developers levy hidden charges like EEC, EEF, IDC, EDC, PLC surface parking etc. However in Delhi, Builders don't charge much for super area because the developments are on smaller plot areas where multiple lifts, Gym, Club, Swimming pool, Landing areas, Lobbies, Jogging Tracks, Grocery Shop etc. are not provided. It does not therefore hurt when a developer of the multiplex or group housing project charges about 25% extra on account of the so called loading. Since he can not charge for above mentioned facilities like multiple lifts, lobbies, Gated security, lawns, Swimming pool etc., loading charges help him to enhance his profits and prosper so as to stay in business and expend. However some developers are unscrupulous and exploit the loading factor to the disadvantage of the buyer who has no access to the plans where by he can know what exactly he is getting. As long as it is transparent he will learn to relax while being raped.
Anil N
Anil, We all know from elementary economics that there is no free lunch! Therefore, I do not expect developers to absorb the cost of lifts, lobbies and the like. It will be economically imprudent and simply not possible. What I'm simply suggesting is developers sell on the basis of carpet area. Whatever costs are incurred on account of extras can then be added on the carpet area price. This way as a buyer I know what I'm paying for. Today if I buy a 2000 sq ft aptt I don't know if I'm buying 2000 sq ft less 15%, 20% or 30% (yes, builders are giving upto 30% less)!! Therefore, as a buyer one may not always know what one is paying for unless the price is quoted in carpet area.
I think it is a matter of time before this policy is implemented and enforced.
Trust that helps.
Later,
Ashish
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