Pre-launch schemes by residential developers may soon vanish

In June 2013, Union cabinet approved the Real Estate Regulatory Bill, which prohibits residential unit sales by developers before obtaining all approvals. Though still not approved by the 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.

It is pertinent to mention that the Indian central bank prohibits funding for land purchases to avoid land hoarding, and pre-launch was an alternative funding mechanism for developers. Thus, in its current form, would the Bill create funding constraints for Indian developers?

Let's look at China as a comparison. The practice of pre-launch does not exist in China and banks are prohibited from making 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 typically responsible for land acquisition, rehabilitation and resettlement, while developers purchase land from government with clear title. 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.

Pre-launch leads to information asymmetry and, thus, 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.

(Suvishesh Valsan is senior manager – research at Jones Lang LaSalle India)