Mumbai real estate breathes easy with ‘Premiums’ reduced but needs more to resuscitate: Shishir Baijal

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    Authored by Mr. Shishir Baijal, Chairman & Managing Director, Knight Frank India

    At the beginning of this decade, the real estate sector went through an upward movement with price appreciation and sales growth adding strongly to the economy. It was at the same time with the government, and its agencies started raising the cost/premiums of floor space index (FSI) which led to an upward revision of premiums, development charges as well as Ready Reckoner rates on almost an annual basis.

    Shishir Baijal, Chairman and Managing Director, Knight Frank (India) Pvt. Ltd.
    Shishir Baijal, Chairman and Managing Director, Knight Frank (India) Pvt. Ltd.

    The sector however took a downward turn circa 2014–15with sales volumes reducing and the price correction hitting the profit margins of developers. The sector’s woes have compounded further especially over the last 10 months since the Non-Banking Financial Company (NBFC)crisis. The liquidity crisis in the (NBFC) sector has hit the real estate industry hard, developers are finding it difficult to raise construction finance and those who are able to raise funds, are borrowing at a higher cost.

    Developers were trying to counter the decline in sales by reducing prices, but the removal of input tax credit (ITC) in the revised Goods and Services Tax (GST) regime has further dented the is shrinking margins. In such a scenario, the rise in cost of borrowings and paucity of finance is hampering the viability of projects. The margins have contracted and the risk-adjusted returns, currently, do not justify the real estate business proposition.

    Reduction in premiums

    While  a series of impedimental events were plaguing the sector over the past few years, the government and its agencies have remained passive and have been rather reluctant to reduce the cost/premiums on FSI. Finally, after several pleas made by developers, the State Government of Maharashtra has acquiesced and passed the proposal to reduce the premiums on FSI for residential as well as commercial. This is a welcome move and although in limited magnitude, it will help improve the viability of projects.

    PROPOSED CHANGES IN PREMIUMS

    Existing provision Proposed change
    Development Cess Equivalent to 100% of Dev Charges for BUA over and above Base FSI and FFSI 0%
    Additional FSI beyond permissible FSI for commercial and IT/ITeS 50% 40%
    Additional paid FSI for residential 50% 40%
    Premium on Fungible FSI for residential 50% 35%
    Premium on Fungible FSI for commercial 60% 40%

    Source: DP 2034, Media reports

    Many redevelopment projects in Mumbai were previously not able to take-off as the premiums and development charges were making the entire proposition unviable. The government has taken note of this and waived-off the development charges entirely for a period of two years. In addition, the reduction in premiums would help bring down the overall construction cost. The need for funds for paying these charges would also come down and help the be leaguered sector.

    The rationalization of premiums and waiving-off of development charges was imperative and would be beneficial in the short term. But it is unlikely to solve the problems of the sector as the larger issues of demand generation and affordability as well as entity and project level funding remain unaddressed. Hence, this move of reduction in premiums and waiving off of development charges would only help developers on the aspect of project feasibility.

    Read more from the real estate expert here.

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