Prohibition of pre-launch sales in India means funding constraints

PETALING JAYA: In India, pre-launch schemes by residential developers may soon vanish pending the Real Estate Regulatory Bill and this will create funding constraints for future projects, according to a recent report by Jones Lang LaSalle India.

“In June 2013, India’s Group of Ministers (the Union Cabinet) approved the Bill, which prohibits residential unit sales by developers before obtaining all approvals,” said the report.

“Though still not approved by its parliament, the Bill has aroused debate about the viability of developers’ current business practices and the Bill’s likely impact on land cost and housing affordability,” said the report.

According to the report, the Indian central bank prohibits funding for land purchases to avoid land hoarding, and pre-launches are an alternative funding mechanism for developers. In its current form, the Bill would create funding constraints for Indian developers.

Pre-launches do not exist in China and banks are prohibited from giving loans for the purchase of land use rights. However, capital markets in China are highly liquid and developers have many sources of funding, including the corporate bond market onshore and in Hong Kong, project-level equity joint ventures with domestic or foreign funds and institutions, as well as lending from trusts and other non-bank financial intermediaries.

“In China, the government is responsible for land acquisition, rehabilitation and resettlement, while developers purchase land from government with clear titles. Since the land title is clear, developers can mortgage their land to acquire additional funds for construction work. In India, however, developers are responsible for land acquisition and rehabilitation, causing delays, manipulations and litigations,” stated the report.

While the proceeds from pre-launch sales in India may serve to provide funds for the developer, which could be used for part-payment of land, acquisition of another piece of land or meeting approval-related costs, the report pointed out the risks created by this.

“Pre-launch leads to information asymmetry and should be abolished. Simultaneously, there is a need to provide practical solutions to the genuine funding needs of developers. Either the bank funding channel needs to open up, or a better market environment must prevail to attract more private investors,” the report said.

This article first appeared in The Edge Financial Daily, on January 24, 2014.

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