A PRE-LAUNCH BOOKING COULD FETCH HANDSOME RETURNS

Gazzaley31 · Joined: 09 Nov 2007 Posts: 1

It is a growing phenomenon and while in the best-case scenario works as a win-win situation for the buyer and developer, due to the inherent risk involved, pre-launch bookings have now started attracting the attention of regulatory authorities. Pre-launch booking refers to the practice where a developer accepts money from potential flat buyers before the formal launch of the project – sometimes even before getting the necessary approvals and commencement certificates. For the developer, it is an easy source of working capital which otherwise would have to be borrowed from banks or financial institutions. For the flat buyer, given rising property prices, it offers a huge potential upside; typically prelaunch prices are far lower than the prices offered once the project is complete. However, like in any risk-reward situation, these handsome returns mean that there are risks involved as well – in fact, the higher the potential rewards, typically, the higher the risks. And sometimes the equation could go awry.

According to a recent report, the Ministry of Corporate Affairs had decided to keep a close watch on the pre-launch announcements made by real estate developers after receiving investor complaints on the issue. The ministry believes that often customers do not understand the risk-reward equation and take decisions based on incorrect or incomplete information. There is also thinking within the Ministry to ask the Monopolies Restrictive Trade Practices Commission to look into the matter, as an unfair trade practice.

Builders contend that pre-launch bookings have their place. They are good if the builder is reputed and has a track record. Financiers who finance builders, investors of Real estate Cochin and sections of customers invest in the projects at an early stage and exit after the project is complete, booking handsome profits. However they caution that for the ordinary customer, it is better if he enters the scene when the commencement certificate is obtained and when sample flats are ready.

Today, middle-class buyers are tempted to get in early, as prices in the last two years have gone up by 100 to 200 percent. The customer has to decide between higher risks and higher returns or go in for ready constructions where a safe package would mean higher prices. Generally the risk reward ratio is proportionate.

The builder needs working capital as he has invested in the land, invested in approvals. The consensus is buyers need to exercise discretion in selecting the builder and prudence in terms of the risk.