Maharashtra move to cut construction premiums to lower project costs by 17%

However, developers peg the benefit at 6 to 7 per cent after passing on stamp duty costs to buyers

The Maharashtra government’s decision on Wednesday to reduce construction premiums and levies by 50 per cent till December 31 could result in savings of 12-17 per cent in project costs, said analysts.

At present, the various floor space index (FSI) premiums/fungible FSI and payments for other concessions account for 25-33 per cent of the overall project cost (including land). The waiver may result in a 12-17 per cent saving on this, said Adhidev Chattopadhyay, an analyst with ICICI Securities.

FSI defines the extent of construction permitted on a plot of land. “We await the fine print on the exact nature and terms of the FSI/premium waivers. However, assuming that developers get 50 per cent discount on all premiums levied by the government on construction projects till December 31, 2021, this may result in significant one-time cost savings for a developer,” Chattopadhyay said. 

However, developers feel the savings might be lower. “After passing on stamp duty benefits to buyers, we believe there is a six-seven per cent cost saving,” said Kamal Khetan, chairman of Sunteck Realty. 

Chattopadhyay said the key beneficiaries would be developers who have adequate liquidity and the confidence to launch and sell new projects, especially in Mumbai and its suburbs.Companies such as Godrej Properties and Sunteck Realty are expected to benefit as they have many upcoming launches in Mumbai city and its suburbs and in Thane and Pune. Sunteck Realty is looking to launch three to four projects in and around Mumbai in the next six-nine months, Khetan said.

Godrej Properties is looking to launch projects in Thane, Pune, and Mumbai, while Oberoi Realty is looking to launch phase-III of its Goregaon project and new towers in Thane and Borivali.

“In theory, developers in our coverage universe can choose to avail this one-time window and pay the entire project premiums upfront and save 50 per cent of the costs,” Chattopadhyay said. With base FSI of 1.33 in Mumbai city and 1 in its suburbs, developers can currently go up to 5-6 FSI by paying for FSI premiums or fungible FSI, which accounts for 25-33 per cent of overall project costs, he said.

For Phoenix Mills, the estimated premium cost of Rs 800 crore for developing one million square feet of office space and 500,000 sq ft of retail space at its High Street Phoenix mall could reduce by 50 per cent to Rs 400 crore, Chattopadhyay said. “However, depending on viability of individual projects, a developer may choose to defer payments over a four-five-year cycle and not choose to pay these costs upfront,” another analyst said.