Guess who'll pay for Mumbai's building law changes: You
The changes in Mumbai's development control rules may bring greater transparency, but the home buyer is unlikely to gain much if prices rise as a result.
In a bid to provide a level playing field to developers, reduce discretionary decision-making and bring in greater transparency in the real estate sector, the Maharashtra government on Tuesday announced amendments to the development control rules (DCR), claiming that it will benefit home buyers in Mumbai.
While Chief Minister Prithviraj Chavan says this will bring transparency in the system, property experts are not sure it will have an impact on home prices. Some fear home prices might even harden.
Since the Mumbai municipal authorities expect to collect an additional revenue of Rs 1,000 crore from the changes, no prizes for guessing who will pay the bulk of this bill: the consumer.
In the earlier regime, developers used to get 10 percent "free" floor space index (FSI, the total area that can be constructed as a multiple of plot size) to provide for facilities such as balconies, terraces, flower beds, voids and niches in a plot of land. But the "free" part depended on the whims and fancies of bureaucrats and builders - leaving scope for corruption and bribery. Builders could buy up to 25 percent more FSI by paying a premium.
Under the revised DCR, everything - balconies, flower beds, etc - will be counted in the FSI. With the "free" part of FSI gone, the state government has instead allowed builders to buy up to 35 percent extra FSI at a premium for residential buildings and 20 percent for commercial and industrial development.
The premium payable for the extra 35 percent FSI is 60 percent of the ready reckoner rates and 100 percent for commercial development. Ready reckoner rates are the rates at which stamp duty is levied on property purchased in various areas of Mumbai.
The amendments were brought after planning authorities realised that builders were violating the free FSI, in some cases up to 200 percent. Developers have for the longest time exploited consumers by selling these amenities as salable area illegally and forcing them to pay for these facilities.
"The government has merely regularlised the illegalities of the developers and at the same time will pocket some money out of this deal," Pankaj Kapoor, managing director of realty consulting firm Liases Foras Real Estate Rating & Research, told Firstpost.
For example, earlier a builder would get, say, 100 percent FSI from the Brihanmumbai Municipal Corporation (BMC) but sell around 135 percent FSI to the consumer illegally, thereby pocketing the 35 percent difference. Now, the state government has merely legalised this entire process and will also pocket some money by offering the extra space to the developer at a premium. According to a report in The Times of India, BMC is hoping to earn around Rs 1,000 crore each year by charging this extra premium.
A Nomura report says: "The developer who used to earlier illegally amalgamate the free FSI areas into the apartment can now legally do so subject to a cap of 35 percent of plot area and payment of a premium. This would increase the developers' cost and put pressure on margins, while also not allowing the developer to construct and sell far above the actual FSI level."
The provision, however, is not applicable to rehab buildings in redevelopment projects. Though the Chief Minister said the move aims at curbing the misuse of free FSI and mobilising revenue for infrastructure development in Mumbai, in reality the government is only legalising this misuse.
Moreover, since the builders now have to pay extra to build amenities, the cost of construction will go go up, which will further result in increased property prices.
Says Kapoor, "The only positive outcome from these changes would be the elimination of black money." Once the use of free FSI becomes legal, home buyers will not have to pay for it in black.
Another key takeaway from these policy changes is that the developer will be allowed 25 percent extra parking space free of cost, i.e. without counting the same in FSI or paying a premium for the same. The new DCR has also given relief to realty players by relaxing the requirement of two staircases for buildings up to 70 meters of height and in case the floor plate of buildings is less than 500 meters. The reduction of floor height in residential flats and shops from 4.2 metres to 3.9 metres would eliminate the need to inspect illegal mezzanine floors.
Even though the policy changes are a win-win for both the developer and the government, it is the consumer who will have to suffer in the end in the form of higher prices.
"Affordability should be met by reduction of prices and such measures are not going to help the home buyer, " Kapoor told Firstpost.
The only silver lining here could be the increase in the supply of residential projects through new launches, but whether that will bring about a long-awaited correction in property prices in the city is anybody's guess.