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This article is more than 8 month old.

Explained: How a 50% premium cut will impact the real estate players, homebuyers and state government

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The Maharashtra government’ decision to half the premiums for the real estate projects may result in significant one-time cost savings for a developer and around 5-7 percent cost-benefit for the homebuyers without impacting much of the government’s revenue.

Explained: How a 50% premium cut will impact the real estate players, homebuyers and state government
The Maharashtra government’ decision to half the premiums for the real estate projects may result in significant one-time cost savings for a developer and around 5-7 percent cost-benefit for homebuyers without impacting much of the government’s revenue.
As per the recommendations of the Deepak Parekh committee, the state cabinet on Wednesday approved a 50 percent concession on all the various premiums levied by the government on construction projects till December 31, 2021. This also includes concessions in the premiums levied by all planning authorities/local administrations in Maharashtra.
“This move will go a long way in expediting the project completion and the industry will witness new launches in the market. The industry applauds this booster dose making many projects viable and we shall adhere to the rules laid down in lieu of availing these benefits,” said Niranjan Hiranandani, President, NAREDCO.
The real estate veteran also believes that the reduction in premiums for new launches will help the development at the lesser input cost and over a period of time there is a possibility of lower price for new inventories that shall come into the market.
Maharashtra cabinet clears proposal to cut government levies on real estate by 50%
Currently, the various FSI premiums/fungible FSI and payments for other concessions account for between 25-33 percent of the overall project (including land) and sector experts believe that the waiver may result in a 12-17 percent saving on overall project cost.
There are as many as 22 premiums collected in Mumbai under various heads - including FSI, staircases, lift well, lobbies, etc. This is significantly higher than in all other comparable top cities in the country. For instance, in Bengaluru developers have to pay 10 different premiums and charges, and in Delhi five and in Hyderabad just three.
“The 50% reduction will give relief to cash-starved developers and reduce their overall capital requirements. It can also help them avoid project delays due to funding issues. Also, the cut will give a massive boost to developers' execution capacity, and this will result in more projects being developed and completed,” said Anuj Puri, Chairman - ANAROCK Property Consultants.
Puri also expects the redevelopment, which is a critical factor in the city but attracts multiple steep premiums, to become more financially viable for developers.
The more supply in the market will help rein in property prices in the city. As is, property prices in the financial capital are much higher than in other large Indian cities.
As per ANAROCK Research, the average property prices in Mumbai are a staggering Rs 17,845 per sq. ft. In Bengaluru, it is just Rs 4,955 per sq. ft, and in Pune it is approx. Rs 5,487 per sq. ft.
“As a result, the largest potential homebuyer base in Mumbai cannot afford to buy homes here. That said, the government will need to ensure that the resulting cost benefit is passed on to homebuyers. Although, developers may not need much encouragement to do so as they are themselves eager to increase sales via improved affordability,” Puri said.
However, one of the major caveats put by the state government is that to avail the 50 percent reduction in overall premiums, the developer will have to absorb the stamp duty charges of the homebuyers.
In theory, developers can choose to avail this one-time window and pay the entire project premiums upfront and save 50 percent of the costs.
“With base FSI of 1.33x in Mumbai city and 1.00x in Mumbai suburbs, developers can currently go up to 5-6x FSI by paying for FSI premiums/TDR/fungible FSI which accounts for 25-33 percent of overall project costs,” ICICI Securities said in a note.
Additionally, an increase in commodity prices (of steel, cement etc.) is further adding to the cost burden of developers.
“In such a scenario, we cannot expect a developer to pass on the entire cut to homebuyers. Also, the premiums vary from project to project. Hence, in our opinion, the cost reduction could be between 5-7 percent, depending on project-type, facilities on offer etc,” Puri said.
Meanwhile, experts believe that the reduced premiums will bring down the project development costs for the developers and inevitably give a massive boost to their execution capacity, resulting in more projects being developed and completed.
“A cut in construction cost will be a huge relief for developers who have been dealing with low margins. Also, there will certainly be a passing on of the benefit in terms of the price which will lead to increased interest from fence-sitters. This will especially impact luxury housing where the ticket-size is higher,” said Ram Raheja, Director, S Raheja Realty.
There was also a stamp duty reduction in the state recently. Analysts said that the state government benefitted from the improved revenue collection after the real estate sales picked up in the state due to increased affordability, low home loan rates and low cost of acquisitions.
According to Sunil Rohokale, MD and CEO at ASK Group, homebuying has seen extraordinary enthusiasm in the state.
“The move is so valuable at this time to turn sentiment in the residential real estate sector. The developers have started getting much-needed cash flows to complete the projects. The developers will be able to deliver on time,” Rohokale said.
He expects Rs 5,000-10,000 per sq ft reduction on the cost depending on the location and project. He also believes that there no price escalation in the near future.
“Developers are keen to have more sales and more cash flows. They may not hold these cost savings back unless the project is financially unviable. We would not see long period of time of price escalation and it is sure that there will be price reduction or no price escalation going ahead.