Post the 1991 liberalization policy, India began to welcome various multinational corporates that were seeking permission to commence operations locally. Being the financial and commercial capital of India, Mumbai was the first city to witness a significant influx of large multinational firms.
By 1994-95, real estate prices in the city increased to a point where companies started to look for cheaper alternative locations, paving the way for other cities to grow commercially. Demand for both commercial and residential real estate gathered steam.
A policy-driven bullish cycle culminated in an industrial boom, thereby also driving house prices to a peak in 1995. At this peak, some realities of the Indian economy (poor bank penetration, high interest rates, non-transparent real estate market, etc.) came to fore, bringing a correction in market prices. As the Asian Financial Crisis (AFC) erupted in the late 1990s, residential prices witnessed a significant drop, returning to the levels witnessed in the early 1990s.
It took approximately 3-4 years for Indian real estate to recover from the AFC shock. A handful of critical national employment-oriented policies and a reduced interest rate environment instituted by the NDA-led government laid the foundation for a revival in residential real estate prices during the early 2000s. Demand for quality residential apartments began to rise, and was increasingly addressed by developers, powered with money coming through the FDI route which had opened up since 2005.
In 2005, the Jawaharlal Nehru National Urban Renewal Mission (JNNURM), which facilitated huge investments into building infrastructure to connect larger cities with 60+ smaller cities and towns, provided a fillip to overall real estate sentiment.
At the peak of prices during 2008, what emerged was a large accumulation of debt with almost every stakeholder – homebuyers (large mortgages accrued in the quest for buying more houses in a rising price scenario), developers (large accumulation of land parcels), and banks/lending institutions (exposure to outstanding loans to the real estate sector, which was now looking overheated). The ensuing economic slowdown and risk of job losses led to halt of the price rally. Thus, the two cycles of real estate that India has witnessed over the last 2 decades or so, has seen policy stimulus in the beginning and an overheated market in the end.
What the Government has announced
The Maharashtra State Government has officially declared a reduction in the floor space index (FSI). This will benefit commercial and residential real estate buyers alike. FSI has been lowered by 20% and 15% respectively for commercial and residential properties. The FSI percentage has been reduced to 35% from 50% in residential realty projects while this has come down to 40% in case of commercial realty projects, as compared to 60% previously.
Industry players have opined that this landmark move by the Maharashtra Government will go a long way towards lowering overall input costs for commercial and residential real estate projects. This will naturally benefit aspiring home owners and prospective buyers of commercial spaces in Mumbai. This will also help several real estate developers start on their projects which were lying dormant for quite some time.
Impact of the FSI reduction
Experts feel that input costs will be coming down greatly as a result of this move by the Government. Here are some key aspects worth noting-
- Developers will have to pay lower premiums for added FSI, thereby indicating lower input costs.
- This may lead to lower costs of housing units for end-consumers.
- This decision may lead to positive and improved home buying sentiments in a still-sluggish market as per experts.
- Lowering development cess will make redevelopment more viable for builders from a financial standpoint.
- More PMCs will thus be attracted to the redevelopment segment.
- The construction cost will thus go down and there will be a higher incentive for project proposal filing in the construction segment.
- The final consumer will benefit only when the developer passes on his/her benefits to the former.
- High premium rates for FSI used to be a major hurdle for several real estate developers earlier and this led to slower real estate expansion as per reports.
- This move is expected to drive sizable sectoral growth and input cost (premiums) for higher floor space will naturally reduce, thereby making many stalled project proposals viable.
- Developers will be able to hold margins from reducing further on account of escalations in costs.
- The concession is for 2 years and this may lead to a major recovery for the Mumbai real estate market if the initiative is perceived pro-actively by builders.
- Property prices in Mumbai may come down to more reasonable levels, particularly in prime locations of the city.
All in all, experts feel that the major benefits arising from the FSI percentage will be reflected on the final price paid by the customer. This is because developers will now be able to pass on the benefit of lower input costs by reducing property prices by a minimum of 50% of the cut in the FSI percentage.
This should be really good news for all those aspiring to buy property in Mumbai in the near future. Additionally, major infrastructural developments should also keep the market going over the next 1-2 years as per experts.
