Property investors and speculators who book flats even before the project starts are a nervous lot. Civic chief Subodh Kumar’s proposal that the development control regulations (DCR) for building approvals be amended could affect them badly, said property market watchers.
Sources said that most builders sell 20-30% of the apartments to investors even before the construction work commences. These are commonly known as “pre sales”. “They have to make a down payment, which is almost half the cost of the flat, in return for a discount price offered by the developer. This is because permissions to build are still not in place,” said a property market expert. Existing DCR norms permit areas like staircases, passage, lifts, AC plant rooms, etc to be counted free of FSI, and developers calculate their profits based on the extra areas they can exploit in the building by selling them to buyers.
But the municipal commissioner’s proposal to levy a 100% premium on builders, who were taking advantage of these additional spaces,has nowupset their calculations. And their profit margins.Kumar’s proposal plansto restrict this additional construction-—flowerbeds, pocket terraces, decks, voids,etc—tojust25%of the total built up area and charge builders 100% premium for it.
Market sources blame speculators who indulge in pre sales for the inflated property prices in the city and say that when the proposed amendments come into effect, such investors will get their comeuppance.
“Hundreds of investors are worried that builders will either go back on their commitments or demand more money from them,” said a property consultant, who did not wish to be identified. Investors and speculators make a killing by booking flats at an early stage and sell them when rates increase. “Many builders indulge in presale the moment they buy the land and mortgage it to thebank,” said a source.
“People who purchased and people who sold without approvals in place are in a real fix,” said Anuranjan Mohnot, vice-president, private equity (real estate fund)of Motilal Oswal Private Equity Advisors Private Ltd. “There will be drastic reduction in saleable area if the developer delivers what he promised to the investor who purchased the flat without approvals. Perhaps,we may see stand still in such projects if substantial pre-sale is made,” he added.
According to Mohnot,there may be a further liquidity crunch for builders since financiers/investor are now seeing no visibility in development for at least next six to 12 months.
Pranay Vakil, India chairman of Knight Frank, said 90% of builders work on pre sales. “Builders will have to reconcile their profits if these rule come into force. Otherwise, they will reduce the area of the flats,which have already been booked,” he said.
Currently, these additional spaces are not counted in the building’s FSI, which is the ratio of permissible built up area vis-a-vis the plot size. Many builders sell these areas at market price and tell buyers to amalgamate them illegally into their living room or bedroom to make them more spacious.
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