Extra FSI can hit the Redevelopment work

Recently, the proposal of Maharashtra government to put extra charge on builders more for the extra 0.33 floor space index (FSI) given for housing projects is likely to hit redevelopment work in Mumbai‘s suburbs. The Maharashtra government has increased the ready reckoner rates by an average 15% every year since 2008 and now government is now considering linking the premium to be paid by real estate developers for the 0.33 extra FSI to ready reckoner rates of 2015 as against current base of 2008 rates.

Effect of an extra FSI:

If this proposal will be accepted, so according to real estate experts, so real estate developers may not find smaller redevelopment projects in Maharashtra viable because of the financial outgo, as the base rate for calculation of premium will increase by almost 100 per cent. This move will push up the costs for home buyers in Mumbai’s suburbs. If central government is serious about project “Housing for All” or to make homes affordable than they need to take the extra measures as most of the announced aim to boost the government’s revenue, but these, including the latest one, will impact home buyers in terms of prices and lower areas offered to existing owners in redevelopment projects.”

In some of the localities and zones, ready reckoner rates have been revised upward by more than 30 per cent to 40 per cent on yearly basis. For the year 2015, revision in rates is popular in suburbs such as Malad, Chembur, Goregaon, Borivali, Ghatkopar and Vikhroli have been increased by 30 per cent to 40 percent. It is the same for plush residential localities such as Worli and areas near Bandra-Kurla Complex. In a sluggish real estate market where prices are weakening, a rise in cost for real estate developers is bound to hit their margins. This is expected to see low number of real estate developers coming forward for smaller redevelopment affordable residential as well as commercial projects in the suburbs.

As per the Nayan Bheda, CMD of Neptune Group, “All the equations in real estate market will change as costing itself will double with this proposal. Redevelopment projects in suburbs like Borivali, Kandivali, Mulund, Bhandup, Kanjurmarg and Dahisar will be hit severely as the cost will move up without much room for recovering it through any price hike”.  Once the proposal is notified, real estate developers are likely to renegotiate on the old redevelopment project agreements as construction is yet to start for them, because most of the real estate builders will be interested in reducing the compensatory benefits, including extra space for tenants.

In 2001, the state government of Maharashtra had decided to grant 0.33 additional FSI to real estate projects in the suburbs and extended suburbs of Greater Mumbai and central Mumbai by sanctioning an amendment to the Development Control Regulations for Greater Mumbai, 1991. As per the Vvikas Aroraa, Director, Marketing & sales, Runwal Group, “The costing is growing up and it will have two possible ramifications. Either home-buyer will have to pay more, which looks unlikely given the current market scenario, or developers’ margins will suffer whereas; other industries in real estate market is assessed on its net realization and profitability , and based on that redevelopment projects in suburbs may not see many takers”.

It is expected that this will make an impact as additional space to be shared with existing tenants. it is expected that this move will help to low the price of housing on the back of augmented supply in the suburbs. The premium accrued to the state government and the Municipal Corporation of Greater Mumbai from this additional 0.33 FSI was to be used on upgrade the city’s infrastructure. The additional FSI could be availed of on payment of premium.

In the previous years due to highly quoted prices, Mumbai real estate industry had to go through slow down in sales and responses. Several projects were left incomplete due to lack of environment clearance, disputed lands, incomplete approval from authorities, and very often builders were lacking financial support. With the win of Modi led BJP as the new central government, real estate industry expects revival with efficiency in approval process and easier and smoother bank funding.

Currently, the main factors affecting the growth of real estate market of Mumbai are:

• Improved policies of government for boosting the real estate sector.

• State government’s take on its policies related to New Development-Controlled Regulations, Redevelopment, Slum Rehabilitation Act (SRA) and Floor Space Index (FSI).

• Impact of infrastructure changes across the Mumbai Metropolitan Region for boosting the real estate industry.

• Role played by MMRDA and MHADA in the real estate housing sector.

• Reasonable and affordable housing policies.

• Other various factors important for market dynamics like holding capacity of developers, their strategy for sales, acquisition costs, peer pressure for competition, premium on a brand, amenities involved in the project etc.

What about the factors affecting the property prices? These are land cost, price of raw material, technology, labour and others. The existing stock of homes in the city has been constructed with high prices of land and raw materials. Thus, it would not be fair to expect immediate price corrections.

So what are the actual demands or expectation of Mumbai real estate industry? Let us elaborate it:

• A confident government with firm policies for making reality market strong.

• Quick and single window clearance system.

• Easy availability of raw materials at subsidize cost.

• Tax incentives and simpler taxation system.

If all these problems are resolved successfully, it will be a great help in controlling the skyrocket prices in real estate industry and the dream of Modi’s government of ‘a home for all’ in a city like Mumbai will not be a dream anymore.

So, are we seeing any positive changes since the new government? Well, just even before the elections the Housing Sentiment Index (HSI) reflected the signs of improvement in consumer sentiments in Mumbai. HIS is a sentiment index of the Indian real estate market that captures buyer ‘mood’ and acts as a sign of changes in real estate market performance.The HSI improved by 24 per cent as compared to a rise of 5 per cent in the last quarter. The HSI for Mumbai has moved even above 100 for the very first time in four quarters and today it has reached up to 106.
Though with this year we have seen progress in the overall economy, still lot of work needs to be done to revive the lost confidence in the real estate sector. Start of 2014 was quite positive for Mumbai real estate as it saw almost 20 to 30 percent of increase in the sales but later closer to elections transactions started coming to a standstill.