Slow sales may force builders to hold on to prices, but expect the extra cost to be passed on in the future.
The Maharashtra government's recent decision to make developers pay a premium for any floor space index (FSI, the ratio of the total built-up area allowed on a plot vis-a-vis the plot size), eliminating the earlier concessions on this, is likely to have two consequences.
One is to push up property prices, though this may not happen right away. Said Deepak Parekh, chairman, Housing Development Finance Corporation, "Developers won't be able to increase property prices in this market. Owing to the slowdown, I don't think the market can absorb any rise in prices at the moment."
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As a result, builders may have to absorb the additional cost and see an impact on profit. However, come boom time, the cost will definitely be passed on to consumers for all projects, adds Parekh.
Anyway, the so-called 'free FSI' areas were never really 'free' for buyers. As Parekh explains, "Every developer was charging the customers based on super built-up area, whereas he was paying the government for the construction permissions at rates based on carpet areas. This move is just the government's way of doing away with the loophole being exploited by the developers and increasing their revenue."
The other consequence is an expectation of more transparency. After the change, builders can buy up to 35 per cent of the approved FSI for creating additional spaces in residential projects or 20 per cent for commercial projects. They cannot build anything over this. Experts feel this will allow consumers to know the exact detail of the carpet area and super built-up area. Thus, bringing transparency into the system, says Pranay Vakil, chairman of Knight Frank.
Here is how it worked. Builders included spaces like balconies, flower beds, terraces, voids and niches in their building plans. These areas were exempt from 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 these among all the buyers. Thus, all the flats were sold on a super built-up basis.
A note by PINC Research says there were builders which used to violate the free FSI available by using 10 per cent of the free FSI for balconies and terraces but charging 25 per cent loading on these. The builder's excuse was that areas like flower beds and terraces could be known only when the society was formed. And, yet, charged for these areas in construction-linked schemes.
After the amendment, buyers may see a rise in the flat's carpet area. Says Vakil, "The developer has a choice now. He can either use this extra FSI to create niches and flower beds or provide an extended floor, a more usable area, to the buyer."
With the stick came the carrot. The amendment also stipulates that developers can now build or provide up to 25 per cent additional parking of the approved parking space. This won't be a part of the approved FSI and the developer won't have to pay the authorities additionally for this.
Buyers, though, should not expect much relief from this. A high court ruling from here last years says builders cannot sell parking space. 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 these outright. This may continue. In fact, the additional parking space may mean extra opportunities for the builder to pocket profits.
