In what is considered to be a landmark decision, developers in Mumbai will going forward have to pay a premium for any floor space index (FSI) - the ratio of the total built-up area vis-a-vis the plot size- that was "free-of-cost" until now. The big question: Is this good news or bad news for property buyers? Simply put, will this additional cost for builders push up the already expensive Mumbai realty prices further.
According to Sunil Rohokale, MD & CEO, ASK Investment Holding, property pricing is largely driven by what the market can afford to pay. In the current market where property sales have already slowed down, builders may not be able to pass on any incremental cost to the buyers. They may be forced to absorb the additional cost and see an impact on the profit margins.
However, the same may not be applicable to the affordable housing segment. As per Uday Dharmadhikari, CEO, Usha Bremco Realty, the margins in such projects are not very high due to rising input and construction cost. Any additional premium payable will therefore have to be passed on to the consumers.
One may argue though that the so-called "free-of FSI" areas were never really ‘free’ for the buyers. Here is how it worked: Builders included spaces like balconies, flower beds, terraces, voids and niches in their building plans. These areas were exempt of the FSI calculation, that is the total permissible area to be built. Yet when the builder calculated the area for sale, he would include all these spaces and apportion them among all the buyers. Thus, all the flats were sold on a super built-up basis.
As per a note on the amendment by PINC Research, previously, there were builders who used to violate the free FSI available by building 10 per cent of free FSI for balconies, terraces but charging 25 per cent loading on the same. The builder’s excuse - areas like flower beds and terraces area can be known only when the society is formed. And yet, charged for these areas in construction-linked schemes.
“Every builder has been overbuilding the FSI. The amendment will now bring in more transparency into the system,” says Pranay Vakil, chairman, Knight Frank. He feels that builders may not resort to underhanded tactics now to squeeze the maximum FSI out of the authorities. Also now, the builders can buy up to 35 per cent of the approved FSI for creating such additional spaces in residential projects or 20 per cent for commercial projects. And cannot build anything over and above this. Consumers too will know the exact break up of the carpet area and super built-up in the area calculation as a result. They won't have to deal with arbitrary numbers.
A positive outcome of the amendment would be that buyers may see a rise in the carpet area of the flat. Earlier, spaces like flower beds or niches created from free FSI were by rule supposed to be at a level lower than that of the floor. But Vakil explains that, “The developer has a choice now. He can either use this extra FSI to create niches and flower beds or provide an extended floor, more usable area.”
As a compensatory measure, the amendment also stipulates that developers can now build or provide up to 25 per cent additional parking of the approved parking space, free of FSI calculation. For property buyers, this may resolve the parking crunch issue. For builders though, it may be another opportunity to pocket extra income and possibly nullify the cost incurred for additional premium.
As per a high court ruling last year, builders cannot sell parking space. But in reality, all builders either include an additional cost in the agreement or conduct the sale through an all-cash transaction. In some instances, developers even take deposits in perpetuity for open parking spots, rather than selling them outright.
Eventually though once the sales’ cycle reverses, customers must brace themselves for bearing this extra cost. The higher prices will however not be a factor of the higher construction cost. After all, as Vakil says, “When the times are good for real estate, prices go up on a weekly basis.” It is all about demand for realtors.