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Realtors feel heat on pre-launch sale

By Nayantara Rai, in New Delhi
May 07, 2007 08:54 IST
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Rising borrowing costs have been pinching real estate developers over the past few months.

Now, higher home loan rates and the prospect of a market correction are making it difficult for them to pre-sell their residential projects, a standard practice till recently.

"Almost 60 per cent of home buyers are staying away from pre-launches. They want to wait and buy an apartment once they see the apartment building actually being constructed," said Sanjay Chandra, managing director, Unitech Ltd, which is building residential projects of 45 million sq ft, adding that many did not mind paying a premium for their caution.

Pre-launches enabled builders to take advance bookings for a project after getting the requisite building permits, but much before starting construction, providing them with virtually free cash.

But rising home loan rates - in the past six months they have risen 100 to 200 basis points and are falling just short of 13 per cent - are encouraging consumers to defer their purchases till projects are ready.

Many buyers are also holding their purchases in anticipation of a fall in prices - by as much as 25 per cent in small cities. Peripheral suburbs like Kundli near Gurgaon and north of Thane in Mumbai have already seen a 10-15 per cent correction.

"Would you buy a property today if you knew you could buy it cheaper six months later? And more importantly, would you buy it when the builder has not even started construction?" wondered a Kolkata-based developer.

Most developers, including reputed ones, rely on the money from a pre-launch to fund their projects. Some use those funds to expand elsewhere - either to acquire land or work on another project. Now, they have to review their business models.

As a result, some builders are launching projects while raising capital through debt and private placements.

Delhi-based real estate company Best Group has deferred the launch of two residential projects and one commercial complex in the National Capital Region.

"We are not seeing demand right now. Therefore, it does not make sense to plan more projects," said Harjeet Arora, managing director, Best Group.

Another Delhi-based developer with interests in cities like Faridabad, Jaipur and Rudrapur says he will not acquire any more land and only launch projects on real estate he already owns.

This development comes at a time when real estate developers are hit by cash-flow problems after a two-year high. Domestic banks will not lend to them for less than 14-15 per cent.

External commercial borrowing, which could have been accessed at finer rates, has been banned, except for integrated townships of more than 100 acres.
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Nayantara Rai, in New Delhi
Source: source

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