LOCK-IN-PERIOD CLAUSE TO PREVENT SPECULATION

Wednesday, 13 May 2015

LOCK-IN-PERIOD CLAUSE TO PREVENT SPECULATION

LOCK-IN-PERIOD CLAUSE TO PREVENT SPECULATION

The property developers in the country are to incorporate a new clause known as "lock-in-period" clause in the agreement to sell to prevent speculations in property dealings.

"Lock-in-period" clause means that the buyers cannot sell their properties within a certain period after booking the property or have to pay a penalty if they do so. The lock- in-period are expected to be introduced mostly for mid-income projects, that offer prices 20 to 30 percent below the market price and, therefore, attract more undercutting from bulk discount buyers. Margins on mid income housing projects are 20 to 25 per cent compared with 50 to 70 per cent for premium housing. In the boom years of2006 and 2007,30 to 50 per cent of housing projects were sold on bulk discounts.

Now, companies such as Tata Housing will not issue no-objection certificates to property buyer for the first six months after allotment while DLF Ltd., India's largest listed realtor, would not transfer the title of the property in the name of the buyer for a year after a property is booked. According to the chairman of Omaxe, a Delhi based organization that Omaxe will introduce similar clauses in all their future affordable housing projects. The companies do not want short-term investors to compete with the company later in the market, as the margins in affordable housing are very low. Omaxe is launching 10 mid-income projects this year.

DLF Ltd., claims it is the first developer to introduce the clause for both premium and mid-income projects. According to the Executive Director, the company has decided to discourage speculation in property dealings since the same buyer used to buy five to six flats in their projects and sell them within a month in the open market for premium. Hence, this lock-in-period clause. Several other companies have imposed a steep transfer charge Rs.100 to Rs.1000 a square foot if the first time buyer sells the property within a specified period to prevent speculation in property dealings.

This approach of the developers has attracted criticism from analysts. According to Chairman, Knight Frank India, developers want the best of both worlds. They want to delay registration and charge of transfer fee because once a property is registered it is binding on developers.

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