Mumbai real estate gets a boost from new rules

Written by Shubhra Tandon | Mumbai | Updated: Jan 7 2012, 08:52am hrs
The amendments to the Development Control Rules (DCR) for Mumbai announced by the Maharashtra government earlier this week will not only ease supply of new apartments into the market, but also enable more realistic land valuations, expect real estate consultants.

Though the new norms could impact developers' margins, analysts say it will also mean pricing based on carpet area, bringing in more transparency and fair practice in the sector. Developers, too, have welcomed the move, stating it will bring everyone on a level playing field.

The year 2011 was a damp squib for the real estate sector in Mumbai. Apart from Reserve Bank of India tightening the noose over lending, developers also faced the wrath of local regulatory authorities. There were very few approvals given to projects, leading to a pause on fresh supply of apartments in the market.

In 2011, a mere 19,470 residential units were launched in Mumbai, a drop of 65% compared to 54,968 units launched in 2010, according to data compiled by Eyestate, a joint initiative by Knight Frank India and Indicus Analytics. Under the new DCR, flower beds, balconies, terraces and other areas, which were free of Floor Space Index (FSI) calculations, will now form a part of FSI calculation in lieu of premium levied from builders. FSI is the ratio between the built up area allowed and plot area available.

According to the new rules, developers will be allowed to develop 35% of the plot area over and above the permissible FSI for residential projects and 20% for commercial projects. To gain this extra developable area, they will have to pay 60% of the ready reckoner rate in case of residential projects and 100% in case of commercial development. Ready reckoner rates are primarily used to calculate the market value of flats for stamp duty and registration charges.

"The developer who used to earlier illegally amalgamate the free of FSI areas into the apartment can now legally do so, subject to a cap of 35% of plot area and payment of a premium," says Aatash Shah, research analyst, Nomura Equity Research. In a report dated January 4, Shah also says that while this would increase the developers cost and put pressure on margins, it will also not allow them to construct and sell far above the actual FSI level.

With regard to impact on pricing of apartments, analysts say it is unlikely to cause an increase in prices. In fact, there will be new pricing strategies that could evolve. "Costs are expected to increase," says Kejal Mehta, research analyst, Prabhudas Lilladher in a research report dated January 4.

According to Mehta, with the present pricing scenario, "developer's margins could get hit by about 9% on a standard project". However, she adds, "Since the developer can use this FSI to increase carpet area, new pricing strategies based on carpet area shall emerge".

Real estate consultants said this will give a much needed breather to the almost stagnant supply addition in the Mumbai market. "This has finally cleared the air of uncertainty hanging over the approvals of projects because of which supply got delayed in the market," says Anand Narayanan, national director (residential agency), Knight Frank India. Developers too have welcomed the move.

The premium on FSI is a legitimate issue, says Niranjan Hiranandani, founder and MD, Hiranandani Constructions. "This move will enable the money going for bribes go into the coffers of the state.