Published on 11/09/2019 12:26:56 PM | Source: ICICI Securities Ltd

Real Estate Sector - Mumbai: Reduction in FSI premium charges offer marginal relief By ICICI Sec

Posted in Broking Firm Views - Sector Report| #Real Estate Sector #Sector Report #ICICI Securities

Mumbai: Reduction in FSI premium charges offer marginal relief

As per media articles, the Government of Maharashtra has given approval for a reduction of 15-20% in various development/FSI premium charges in Mumbai’s city and suburbs that are paid by developers. As these FSI costs typically account for 30-35% of overall construction cost (excluding land), the reduced FSI charges may reduce overall project cost by 5-6%. In our view, this provides a temporary relief for developers and may help to revive a few stuck projects and offer marginal relief for developers. However, we do not expect this cost reduction to translate into any benefits for home buyers in Mumbai as majority of developers struggle with interest and vendor payments. Organized developers like Oberoi Realty, Godrej Properties and Sunteck Realty will continue to benefit from sector consolidation.

* FSI premium costs to reduce by 15-20%: As per media sources and our industry interactions, the proposed reduction in FSI premiums is likely to be formally notified by the end of August 2019 under the new Development Control Regulation (DCR) 2034 for Mumbai. The revised charges would benefit ongoing projects where construction has been partially completed (to the extent where commencement certificate has not been fully obtained) and new projects where the development charges are yet to be paid by developers. Typically, the costs for various premiums for FSI/fungible FSI and development cess on additional FSI range between Rs1,000-2,000/psf on saleable area basis across Mumbai’s city and suburbs. At a project level, excluding land costs, these premiums would account for 30-35% of overall construction costs which are between Rs5,000-6,000/psf on saleable area basis. Hence, a reduction of 15-20% in FSI premium costs would translate to an overall saving of 5-6% in overall construction cost for a developer. The reduced FSI costs are likely to be in place for 24 months from the date of the formal notification. The major reduction proposed is the premium on fungible FSI for residential projects being brought down to 35% of the ready reckoner rate from 50% currently and waiving of development cess over and above the base and fungible FSI.

* Developers to get marginal relief: In the case of many stuck projects in Mumbai, the hefty premiums payable by developers has led to many projects being stalled midway owing to lack of cash flows to pay these premiums. With developers having made numerous representations to Government authorities over the last 12 months to provide some relief, few of these stuck projects may finally start moving. In the case of projects which are yet to commence, developers can now factor in the reduced premium costs to arrive at a revised cost and may look to pass on the cost reduction to home buyers at the time of launch.

* Home buyers unlikely to be benefited: In theory, the reduced FSI costs should translate to reduced costs for home buyers as developers look to boost their cash flows. However, majority of developers in Mumbai (except for a select few with strong balance sheets) are currently grappling with delayed interest and loan payments. Additionally, our channel checks suggest that payments to vendors and staff have also been delayed as developers struggle to manage their cash flows. Hence, the reduction in FSI costs may get eaten up by arrears of interest payments and corporate overheads which would prevent developers from passing the benefits to home buyers. Developers in Mumbai are already offering a 10-20% discount on the ticket price through various time-linked schemes/freebies/negotiation across the table to buyers and any further price reduction would be more a function of weak demand as opposed to reduced costs for developers. 


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