Realtors plan lock-in clauses to weed out speculators
Business Standard, May 29, 2009, Page 1
Neeraj Thakur & Raghavendra Kamath / New Delhi/mumbai
Stung by recent experiences, many real estate companies such as Tata Housing, Omaxe, DLF and others are planning to impose lock-in periods of up to one year for their mass housing projects.
A lock-in clause means buyers cannot sell their properties within a certain period after booking the property or have to pay a penalty if they do so.
Realtors are doing these because investors or speculators often leveraged volume discounts on property purchases to re-sell them at prices lower than those available to individual buyers. This created problems for realtors when demand slowed, since it put pressure on them to take a hit on margins and lower prices still further.
In the boom years of 2006 and 2007, 30 to 50 per cent of such projects were sold on bulk discounts, especially in the national capital region.
Now, companies such as Tata Housing will not issue no-objection certificates to property buyers for the first six months after allotment and DLF, India's largest listed realtor, said it would not transfer the title of the property in the name of the buyer for a year after a property is booked.
Several other companies have imposed a steep transfer charge — Rs 100 to Rs 1,000 a square foot — if the first-time buyer sells the property within a specified period.
The lock-ins are expected to be introduced mostly for mid-income projects, that offer prices 20 to 30 per cent below the market and, therefore, attract more undercutting from bulk discount buyers.
''We are going to introduce such clauses in all our future affordable housing projects. We do not want short-term investors to compete with us later in the market, as the margins in affordable housing are very low," confirmed Rohtas Goel, chairman and managing director of Delhi-based developer Omaxe, which is launching 10 mid-income projects this year.
Margins on such housing projects are typically 20 to 25 per cent compared with 50 to 70 per cent for premium housing.
DLF Ltd, the country's largest developer, claims it is the first developer to introduce the clause for both premium and mid-income projects.
"Earlier, the same buyer used to buy five to six flats in our projects and sell it within a month in the market. We, as the largest developer, decided to discourage such speculation", said Rajeev Talwar, executive director, DLF.
The clause, however, has attracted criticism from analysts. "Developers want the best of both worlds. They want to delay registration and charge a transfer fee because once a property is registered it is binding on both developers and buyers," said Pranay Vakil, chairman, Knight Frank India, an international property consultant.
The legal fraternity is, however, divided on whether the move was legally tenable.
"It is a contractual obligation and not a statutory one. The statute does not say that a property cannot be sold in a certain period of time. Developers are merely putting pressure on buyers,'' said Vinod Sampat, a Mumbai-based advocate.
He added some Mumbai developers even charged Rs 1,000 a square foot as transfer charges though the state housing department has said the developer cannot charge a single paisa as transfer charges.
PH Parekh, a senior Supreme Court lawyer, said, however, that all legal documents signed by a person were binding, unless he decided to challenge it in court. "If a buyer decides to challenge the lock-in period, the decision of the court can go either way," Parekh said.
Business Standard, May 29, 2009, Page 1
Neeraj Thakur & Raghavendra Kamath / New Delhi/mumbai
Stung by recent experiences, many real estate companies such as Tata Housing, Omaxe, DLF and others are planning to impose lock-in periods of up to one year for their mass housing projects.
A lock-in clause means buyers cannot sell their properties within a certain period after booking the property or have to pay a penalty if they do so.
Realtors are doing these because investors or speculators often leveraged volume discounts on property purchases to re-sell them at prices lower than those available to individual buyers. This created problems for realtors when demand slowed, since it put pressure on them to take a hit on margins and lower prices still further.
In the boom years of 2006 and 2007, 30 to 50 per cent of such projects were sold on bulk discounts, especially in the national capital region.
Now, companies such as Tata Housing will not issue no-objection certificates to property buyers for the first six months after allotment and DLF, India's largest listed realtor, said it would not transfer the title of the property in the name of the buyer for a year after a property is booked.
Several other companies have imposed a steep transfer charge — Rs 100 to Rs 1,000 a square foot — if the first-time buyer sells the property within a specified period.
The lock-ins are expected to be introduced mostly for mid-income projects, that offer prices 20 to 30 per cent below the market and, therefore, attract more undercutting from bulk discount buyers.
''We are going to introduce such clauses in all our future affordable housing projects. We do not want short-term investors to compete with us later in the market, as the margins in affordable housing are very low," confirmed Rohtas Goel, chairman and managing director of Delhi-based developer Omaxe, which is launching 10 mid-income projects this year.
Margins on such housing projects are typically 20 to 25 per cent compared with 50 to 70 per cent for premium housing.
DLF Ltd, the country's largest developer, claims it is the first developer to introduce the clause for both premium and mid-income projects.
"Earlier, the same buyer used to buy five to six flats in our projects and sell it within a month in the market. We, as the largest developer, decided to discourage such speculation", said Rajeev Talwar, executive director, DLF.
The clause, however, has attracted criticism from analysts. "Developers want the best of both worlds. They want to delay registration and charge a transfer fee because once a property is registered it is binding on both developers and buyers," said Pranay Vakil, chairman, Knight Frank India, an international property consultant.
The legal fraternity is, however, divided on whether the move was legally tenable.
"It is a contractual obligation and not a statutory one. The statute does not say that a property cannot be sold in a certain period of time. Developers are merely putting pressure on buyers,'' said Vinod Sampat, a Mumbai-based advocate.
He added some Mumbai developers even charged Rs 1,000 a square foot as transfer charges though the state housing department has said the developer cannot charge a single paisa as transfer charges.
PH Parekh, a senior Supreme Court lawyer, said, however, that all legal documents signed by a person were binding, unless he decided to challenge it in court. "If a buyer decides to challenge the lock-in period, the decision of the court can go either way," Parekh said.
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