Investors in Mumbai flats want money back.Posted on : 16 Mar, 2012
MUMBAI: Property speculators and investors who book flats even before the project is launched are in trouble. Builders who used to take money from them upfront and promised them large areas by manipulating certain spaces in the building, can no longer do so after BMC's stringent building laws kicked in in January.
Across the city, most builders sell up to 30% of their stock at a discounted rate to investors if they pay a major chunk of the amount upfront. These deals are struck when builders do not even have the basic construction approvals in place.
Earlier, when building rules could be manipulated to the hilt, developers misused and sold areas which were not part of the apartment. These areas were then surreptitiously and illegally amalgamated into the flat to make it bigger. New rules have upset the calculations of such builders who had promised larger houses to their investors.
"The rules offer no scope for manipulation. Investors are now asking builders to return their money. There is an uneasy tension between them,'' said a real estate insider.
For instance, in the Bandra-Khar area, a developer has put up 14 of his projects for sale after investors started chasing him to return their money. This developer was notorious for carrying out large-scale manipulations in his projects in connivance with BMC officials.
Till a year ago, areas like staircases, passage, lifts, ducts and AC plant rooms, were not included in the building's floor space index or FSI-the ratio which determines how much can by built on a plot. Many unscrupulous builders illegally sold these areas and calculated their profits based on the extra areas they could exploit. The flat owner was encouraged to merge these areas into the flat.
Under the new rules, these areas are included in the FSI. However, the BMC has allowed builders to utilise 35% compensatory FSI for residential buildings (20% for commercial towers) if they pay a hefty premium to the corporation.
"Investors are not happy,'' said Pankaj Kapoor of Liases Foras, a real estate research firm. "Builders were calculating super built-up area at 100%. Now, the overall saleable area has reduced. Their entire economics has gone for a toss,'' said Kapoor. A developer's initial equity comes from bulk investors who book flats at a cheaper rate. This money is used by the developer to launch the project.
In the past, market sources blamed these investors/speculators who indulge in pre-sales for the inflated property prices in the city. They had predicted that once the new rules were implemented, such investors would get their comeuppance.
A property expert said many investors are worried that builders will either go back on their commitments or demand more money from them. "For years, investors and speculators made a killing by booking flats at an early stage and sold them when rates increased. "Many builders indulge in presales the moment they buy the land and mortgage it to the bank," said a source.
A suburban developer said, "Speculators are the rats of the real estate industry. They are the first ones to jump ship. Unfortunately, builders depend on them because they have the money.''
The new rules have also badly hurt several builders in the Bandra-Khar-Juhu belt, who profiteered over the past decade by bending the building concessions granted to them by successive municipal commissioners. Many of them are in financial trouble or are on the verge of shutting shop.