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Real Estate Myth #3: Higher FSI is the solution to affordable housing

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Often, when it comes to reducing costs of new homes, it is suggested that the government should increase Floor Space Index or Floor Area Ratio. But does it actually reduce the cost for developers?

Real Estate Myth #3: Higher FSI is the solution to affordable housing
Often, when it comes to reducing costs of new homes, it is suggested that the government should increase Floor Space Index (FSI) or Floor Area Ratio (FAR). But does increasing FSI actually reduce the cost for developers?
So, first the basics. FSI or FAR decides the area that can be constructed on a plot. Larger the FSI, larger is the permissible construction area. And logically speaking, larger construction area on the same plot would mean a reduced per sq. ft cost for the developer. Sounds logical. However in reality, the same is not necessarily true.
Firstly, additional FSI generally does not come free to the developer. Approving authorities charge a premium on additional FSI.
Secondly, even when the additional FSI comes free, higher FSI results in taller constructions where the cost of construction
(including firefighting, environment clearance, parking, etc.) is significantly higher than for low-rise structures.
Further, tall buildings need large basement areas to incorporate parking. In areas where approving authorities disallow sale of car parks, basement becomes a big cost burden for the developer. Even when authorities allow sale of car parkings, the recovery from such sales is generally lower than the cost of construction of basement. And since construction of basement is done in the beginning and revenues come much later, it mostly remains a cost centre for developers.
In areas like South Mumbai, where capital values are extremely high, all such costs can possibly be absorbed. But in the affordable segment where sale prices range between Rs 2000-3000 per sq. ft, increasing FSI can reduce costs only up to a threshold level, beyond which increasing FSI only increases developer’s costs and actually works against increasing affordability.
Real estate is not simple arithmetic. It is more complex than one would believe.
Deepesh Salgia is Director, Shapoorji Pallonji Real Estate.
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Follow the Myth Series here.
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Myth Series: What is its purpose?
While real estate is among the fastest growing businesses in India, it rarely finds respectable space in curriculums of business schools. Also, there are hardly any case studies available to explain the intricacies of the sector.
For these reasons, many facts and theories floating about real estate follow a ‘common sense-ical logic’. Unfortunately, many of these are misconceptions, myths or even downright false.
The purpose of this series, therefore, is to take one real estate myth in each blog and provide insights on the real issues.
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