Higher FSI may not make Mumbai homes cheaper

27-Feb-2015    |    Source:    www.economictimes.com

MUMBAI: With the proposed rules, the Fadnavis govt and the BMC are endeavouring to create world-class infrastructure for the Maximum City, but there are many pitfalls, especially regarding environmental viability of the projects and affordability The city skyline may rise but so will realty prices in the coming years if not immediately. The Brihanmumbai Municipal Corporation's (BMC) decision to increase the area that can be developed on a plot of land in the city's different pockets may spur construction of swanky high-rise buildings, say consultants and builders. But consumers may have to pay for it through their nose as builders pass on the higher cost of paying for more FSI or floor space index. Realty prices, already the most expensive in the country, may rise in the coming years, experts warn. If BMC's intention is to augment housing supply and make it affordable, it may not lead to the desired outcome. BMC officials say that they want to decongest the city by giving builders room to build taller residential and commercial complexes. In a city starved of space, the only way to grow is to increase the FSI, which refers to the development potential of a plot of land. Town planning experts and urban planners agree but the way BMC has gone about giving this additional space to builders is likely to increase cost for property buyers. Take for example Andheri West, one of the most crowded and congested areas in the city. As per BMC's plan, the area near the suburban railway station will now have an FSI of 8. This means that a builder can develop about 3.52 lakh sq ft of commercial or residential space on a one-acre plot. But he can't do it just like that. He will have to buy additional FSI of 2.5, which will be 70% of ready reckoner prices in the city; If he wants more space, he can buy an additional 2.5 of FSI, but this will be at 100% of ready reckoner prices. Ready reckoner refers to government rates which are used to calculate stamp duty and other property taxes. These rates are changed every year. The market price around Andheri station is now over . `18,000 per sq feet. If a builder decides to choose this option of buying extra FSI, the price of the property that will eventually be sold will be higher than the prevailing market price. "Prices perhaps will not correct," Shishir Baijal, chairman of property consultancy Knight Frank India said. "The concept is good, but costs involved are steep. In addition to premium for extra FSI, construction cost itself will go up as they go vertical, with all this we can't expect a dramatic change in prices." Others especially builders, were blunt. "What is the objective? Are we working on increasing the housing stock and making houses affordable for people or is this a revenue-raising effort?" a leading builder known for developing a township in the city said. Many developers are concerned about the proposed premium to be charged for additional FSI. "Premium is going to be a huge amount, it will be expensive for builders. Buyers should take note that nothing is being offered for free," said Rashesh Kanakia, chairman of real estate firm Kanakia Group. Urban planners and developers have been suggesting higher FSI and taking the city vertical as a solution for making properties affordable in land-locked Mumbai. However, the same is going to come at a cost and there can be other solutions than can be tried without burdening end users. The `Maximum City' already has the highest population density with 12 million people on 45,800 hectares of land, and this is expected to be rise to 14 million by 2034. Prices have been sky-high for years but recent developments seemed to indicate a possible softening. Sales have been sluggish for a while and inventory has piled up with many builders. Some of them are offering discounts hoping to lure buyers. Real estate experts say that the proposed FSI bands of 3.5, 5, 6 and 8 times would be the highest development permissible on a plot. The proposed maximum development can be achieved through purchase of rights from the market or the government. The final FSI profile will comprise of four layers including the base FSI, premium FSI A, development rights originating from land surrendered for public utilities and then premium FSI B. The real issue here is that the civic body has linked the premium for extra FSI to ready-reckoner rates that are revised every year. Developers fear that this will also lead to rise in prices of Transferable Development Rights. "If it's (premium for extra FSI) attached to the ready reckoner, it can be a good revenue generator for BMC, but will be counter-productive as far as prices are concerned. We have already seen this year, that ready reckoner can be higher than even the actual market price. Even TDR prices will go up as more developers will try to attain the highest FSI and go vertical," said Lalit Kumar Jain, national chairman of Confederation of Real Estate Developers' Associations of India ( CREDAI). Some consultants don't believe that prices will rise from current levels. "Developers cannot just continue to escalate prices, but they also need to see if market can really absorb this," said Anuj Puri, chairman & country head at JLL India.

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