Property prices expected to drop sharply in Mumbai as real estate sector applauds government move.
After reducing stamp duties in the state to boost residential sales, the Maharashtra government on January 6 approved the proposal to cut the premium on real estate projects by half till December 31, 2021. Developers availing of the scheme would have to pay full stamp duty and registration charges on behalf of homebuyers.
At the cabinet meeting chaired by chief minister Uddhav Thackeray, it was decided that the urban development department will give premium concession to construction projects. Projects will have to pay full stamp duty to customers.
It was decided at the meeting that as recommended by the Deepak Parekh Committee, a 50 percent discount will be given on all the various premiums levied by the state government on construction projects till 31.12.2021 and also concessions in the premiums levied by all planning authorities/local administrations at their level.
It was decided that in order to avoid the undue benefit of this concession to a particular group or project, the concession will be considered for premium rates whichever is higher, April 1, 2020, or the current annual market price table.
It was decided at the meeting that all projects which want to avail of the premium concession will have to pay full stamp duty for the customers till 31.12.2021. This would ensure that consumers get the direct benefit of the concession that the state government wants to give in the premium.
Premium typically refers to the multiple charges that are levied by the state with respect to approvals for initiating, progressing, and completing the area or additional area in a project.
Real estate experts said that the move will go a long way in expediting project completion and the industry will witness new launches in the market. Also, the premium reduction, coupled with the stamp duty charges, which will also be borne by the developers, will lead to reduced cost for homebuyers.
The move will help rationalise input costs for the developers as well as help supply momentum, thereby keeping price escalation in control. It is also expected to make the real estate sector attractive for investments from institutions.
The Shiv-Sena-led urban development department had proposed lowering of all construction premiums by 50 percent till December 31, 2021, for all ongoing and new projects. The proposal was to charge all ongoing and new projects – sanctioned before December 31, 2021 – discounted premiums of 50 percent for all payments paid on or before the December-end cut off.
On the recommendations of the Deepak Parekh committee, the Maharashtra government had been weighing a reduction in the premiums on real estate projects under the Development Control and Promotion Regulations (DCPR). The committee had also proposed that the reduced premiums be paid at the time of granting the occupancy certificate, without any interest being levied.
According to the committee, as of date, there are as many as 22 premiums collected in Mumbai under various heads - including FSI, staircases, lift well, lobbies, etc. This is significantly higher than in other comparable top cities of the country.
In Bengaluru, developers have to pay 10 different premiums and charges, and in Delhi five and in Hyderabad just three.
Also Read: Explained: What does the reduction in premium mean? Will it benefit Maharashtra’s real estate developers and homebuyers?
The real estate sector applauded the cabinet’s decision.
“It is a great bolstering move made by the state government by sealing approval to reduce premiums by 50% under the new DCPR rule 2034 across the board for on-going and new projects up to Dec 31, 2021. This move will go a long way in expediting the project completion and the industry will witness new launches in the market,” said Niranjan Hiranandani, president NAREDCO.
“The industry applauds this booster dose making many projects viable and we shall adhere to the rules laid down in lieu of availing these benefits. Also, the reduction in premiums for new launches will help the development at the lesser input cost and over a period of time there is a possibility of lower price for new inventories that shall come into the market,” he said.
“It is a move expected to meet the urgent need for economic activity and generating employment. The industry will be injected with additional liquidity in the backdrop of cumulative policy reforms due to the Covid pandemic, which has been considered as a 'force majeure' situation by the Government of India. This reduction in premiums will help in quick turnaround of projects and uplifting Industry sentiments," he added.
Deepak Goradia, president, CREDAI MCHI, also welcomed the decision.
“We are confident that this move will expedite the economic recovery of Maharashtra with more than 250 allied industries dependent on the real estate sector, which will also generate widespread employment. The premium reduction, coupled with the stamp duty charges which will also be borne by the developers, will lead to reduced cost for homebuyers thereby increasing their purchasing power - further underlining the opportune time for them to buy a house in MMR.”
This move will help rationalise input costs for the developers as well as help supply momentum, thereby keeping price escalation in control whilst striving towards the demand–supply equilibrium in the market. However, since both the demand side as well as supply-side measures are short term, it may prove beneficial to jump-start the real estate sector giving it an orbital velocity for next level growth.
“This will also make the sector attractive for investments from institutions. The reduction in premiums, coupled with the revision in stamp duty (that has helped catapult demand) will make real estate development in the state lucrative. Going forward, following the growth trend of demand, we expect new launches to increase accordingly,” said Shishir Baijal, Chairman and Managing Director, Knight Frank.
Mani Rangarajan, Group COO, Housing.com, Makaan.com, and Proptiger.com, said that the "Reduction in real estate premiums by 50% in Maharashtra will provide a further boost to the sector in the state. After being hit by the pandemic, the realty market has seen an uptick in the state post stamp duty cut by the Maharashtra government and interest rate status quo by RBI in the last four months.
The reduction in premiums would help the Mumbai market as the city collected as many as 22 premiums under various heads, which is higher than other top cities.”
High premium puts a financial burden on developers leading to higher costs for the homebuyers. In the current economic scenario, the step would ease the burden and soften the prices resulting in more sales in the coming months. Look forward to a further extension of stamp duty waiver for the next few months to revive the demand, he said.
Real estate experts said that the premium charges on real estate development have always been a major cost component for Mumbai's developers. In the current market environment of compromised liquidity, they can be crippling.
On an average, one-third of the overall project cost a real estate developer incurs in Mumbai goes towards various premiums. In one notable case, for a plot of land valued at Rs 5 crore in Bandra, the developer had to pay premiums to the tune of approximately Rs 6 crore to the BMC, they said.
Real estate experts said that builders should pass on the resulting cost benefit to homebuyers.
“While there are several factors responsible for Mumbai's sky-high housing prices, the hefty premiums that developers have to pay to the state government are definitely among the prime reasons. That said, the government will also have to ensure that the resulting cost benefit is passed on to homebuyers. However, developers may not need much encouragement to do so as they are themselves eager to increase sales via improved affordability,” said Anuj Puri, Chairman – ANAROCK Property Consultants.
Also, reduced premiums can help developers avoid project delays due to funding issues. A significant reduction in these premiums will give a massive boost to developers’ execution capacity, and this will result in more projects being developed and completed, he said, adding redevelopment, which is a critical factor in the city but attracts multiple steep premiums, also becomes more financially viable for developers. The added supply all around will help rein in property prices.
Kaushal Agarwal, chairman, The Guardians Real Estate Advisory, said that the move is likely to propel developers to offer extended payment holidays and also give lucrative price proposals to buyers in projects where the inventory has been selling slowly. While the pandemic and subsequent lockdowns made developers focus on completing existing projects and largely postpone launching new ones, this move of halving the different kinds of premiums and levies is going to make developers contemplate going back to launching new projects.”
According to Siva Krishnan, managing director (Chennai) and India Head, Residential Services, JLL India, the move will help reduce the landed cost for developers thereby rationalising costs and reducing the burden on customers. It is expected to further trigger the recovery of the residential real estate market which has seen a good uptick in the last two quarters due to factors like lower interest rates, pro-active measures from the government such as stamp duty reduction.
However, Rohit Gera Managing Director, Gera Developments, said that the effective benefit would be much less than 50%.
"The move to reduce the premiums is extremely welcome. It will provide respite to the cost burdens for developers thereby spurring on more supply at lower prices. However, the charges paid for approvals include development charges and other charges under other heads. Effectively this means the total benefits will be much less than 50%," he said.
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