Developers bank on GDP growth to push future home sales
Real Estate

Developers bank on GDP growth to push future home sales

Mumbai builders are queuing up to take advantage of the development premium discount offered by the state government. Industry leaders talk to E Jayashree Kurup that they are confident this large volume of stock, which will hit the market in the next 3-4 years, will continue to fly off the shelves as new segments of the economy emerge from the slowdown.

Has the over 47,000 homes sold in the MMR (Mumbai Metropolitan Region) from July 2020 to March 2021 taken the edge off the buyer's appetite? Will the upto 50% discount on development premiums lead to a massive amount of stock which could create a glut in the market?

Developers in Maharashtra had already received a shot in the arm when the state government dropped stamp duty rates to 2% till December 2020 and to 3% till March 2021.

Mumbai builders are queuing up to take advantage of the development premium discount offered by the state government. Industry leaders talk to E Jayashree Kurup that they are confident this large volume of stock, which will hit the market in the next 3-4 years, will continue to fly off the shelves as new segments of the economy emerge from the slowdown.Has the over 47,000 homes sold in the MMR (Mumbai Metropolitan Region) from July 2020 to March 2021 taken the edge off the buyer's appetite? Will the upto 50% discount on development premiums lead to a massive amount of stock which could create a glut in the market?Developers in Maharashtra had already received a shot in the arm when the state government dropped stamp duty rates to 2% till December 2020 and to 3% till March 2021. As a result of this incentive, home buying shot up. Mumbai, along with Pune, accounted for over 45% of houses sold in India between January and June 2021, according to a Knight Frank report. CREDAI-MCHI President, Deepak Goradia told Construction World that the development premium in Mumbai, applicable on additional and fungible FSI, is available till Dec 2021. However, with a particularly vicious second wave of Covid infections, many developers who would otherwise have availed the benefit, have not been able to do so as the markets have not yet opened up fully. Even officials at the municipal authorities are not yet available in full strength. As a result, it has not had the complete intended benefit and the industry is asking the government for an extension. (See box) However, many developers have already availed of the discount in development premium, with a promise to pay the stamp duty on behalf of the consumer when the house is complete and possession handed over. While estimates of the volume of housing coming up because of this policy initiative is still being drawn, there will be a large housing stock that will hit the market 3-4 years from now. This is in addition to the large volume of under construction housing that is currently being completed to meet consumer demand. Anarock Research estimates that 47,150 units have been sold in MMR between July 2020 to March 2021 – almost the same period of stamp duty cuts in Maharashtra. Completed primary market units and floating rental housing in completed complexes have been sold to meet the pent-up demand. Will the same pace of demand continue? Niranjan Hiranandani, President, National Real Estate Development Council (NAREDCO), predicts that this demand will continue and even grow, if India’s GDP grows. “The current round was driven by the IT sector,” he said. As others, including hospitality, tourism etc pick up, there will be demand from employees as well, he predicted. With the vaccination drive picking up pace and the pandemic management showing signs of improvement, stock markets have risen. Cement, steel and other core sectors too are looking up, pointing to a potential rise in GDP.  Goradia expects a lot of property that is currently under construction, to be ready for possession, with corrected prices, by the third and fourth quarters, when another surge in demand is expected. “Sep2020-Mar 2021 was a great run. In the third and fourth quarters, during the festive season, we are expecting a good run again. On ground, under construction and newly launched projects have gone up and work will continue.” Clearly, there is optimism in the developer fraternity. While the stamp duty reduction was an incentive that boosted sales, the reduction of ready reckoner rates enhances the development potential of the land. The impact of this will be in the property that is waiting to be launched. “Demand is high across the board,” says Hiranandani. “However, it is not uniform in every location in every city. Different sizes have differing demands across locations. In certain areas, smaller flats don't have a demand.” Hiranandani predicts that serious players, with a track record proving their ability to complete and deliver quality projects on time, will be at an advantage. They also need meticulous consumer research to be able to predict what type of property would do well in each locality. “The industry needs real assessment to study the demand. Currently, there is not enough research across the board to understand this,” he explained.  Will all this new stock create a glut in the market in the next 3-4 years? Goradia says “The demand run has not yet started. What got absorbed was the pent up demand.” Echoing Hiranandani’s optimism, he said, “The run will start from mid-2022, after more sectors of the economy start performing. When the economy goes up, the demand will go up. Currently, developers are able to sell by marginally negotiating and making the flats cheaper. But everyone needs a house. We do expect that certain sectors such as travel and tourism, airline and hospitality will perform well and their staff too would be able to buy. This should happen in about 3-5 years. Current demand was driven by IT and ITeS, fashion and the film industries. From Mumbai this demand will move to the peripheries, MMR and Navi Mumbai.  Because of upgrades, the primary and secondary markets have been active. “Secondary market products may be older but prices are attractive and maintenance charges low. There has been a lot of demand for second sales after the pandemic,” Goradia said. Will prices hold? Input costs are going up. New launches have to relook at prices. In the last 7-8 years prices have been steady. Goradia predicts that by March 2022, it will inch up 2-5% and another 2-5% in the year after that. But demand is high and is expected to remain high for developers who have a good track record and for localities with good infrastructure connecting them to job hubs.Another positive factor for developers is that post-pandemic there is universal demand. “There is no one segment driving demand. After the pandemic, senior citizens to young couples and people moving out of joint families, all are buying. They are looking for a reasonably good home, at a reasonable interest rate. The 32-40 age group is the largest buyer segment with customers closing deals in just one to two visits.” In such a scenario, he expects new projects and supply to get a boost. Serious players are making long-term plans. Hiranandani expects policy boosts to continue. “GDP growth can only be sustained if real estate and construction grows,” he says. Bankers too have reacted positively to the large bounce back of demand. The risk weightage, that has held back formal finance, is no longer a worry. And with the promise of a bump-up in the economy, real estate developers, lenders and buyers are preparing for a bull run for at least the next four years. E Jayashree Kurup is Director, Real Estate & Cities, Wordmeister Editorial Services LLP. She specialises in research-backed editorialWhat is development premium?In Mumbai Island city and suburbs the government charges developers various premiums over and above the base FSI. (See chart) What is the base FSI in Mumbai?There are three types of FSI 1) Base FSI 2) Paid FSI3) Fungible FSIIs base FSI different for different parts of Mumbai?There are three types of base FSI in Mumbai - 1.33 FSI - in the island city from Churchgate to Mahim 1 base FSI - in the suburban area from Mahim to Borivali and Sion to Thane. 3 Base FSI for cess buildings under 33(7) regulation of DCPRThey come under MBRRB board and have paid cess for 50-100 years and it was the responsibility of MHADA and MBRRB to maintain these buildings. But because they have failed to maintain these buildings, this scheme was initiated 20-30 years ago to attract private investment and included in the present DCPR too.What was the discount offered to developers?Developers get a 50% discount on various premiums for initiating, continuing, completing or purchasing extra FSi in Mumbai. These are calculated on ready reckoner rates of 2019 or 2020, whichever is higher. The 50% discount was applicable till August 31 2021. From Aug - Dec 31 2021, this is reduced to 35%. The discount was offered on Premium FSI, fungible FSI, Open Space Deficiency Premium, Additional FSI due to road width, Staircase Lift Lobby and I to R Conversion.  In the same period, the three-year term of the zero development cess incentive also comes to an end on Aug 21, 2021. Since there was a second lockdown during this period developers have asked for an extension to the development premium discounts. When will the reduced development premiums be paid?The development premium is based on location and land rates based on ready reckoner rates in the area. It can be as much as Rs 2,500-3,000 per sq ft on RERA carpet area. This is to be paid by the developer only on receiving the Occupation Certificate after the construction is done. Thus there is the benefit of the deferred cash outflow. In return the developer is required to pay the stamp duty for the apartment on behalf of the buyer whenever the property is registered. How will the process be tracked?The municipality has come out with a measure to track the entire process that should take about 3-5 years to conclude – all information and approvals as well as progress of the project has to be uploaded on a common portal which can be transparently tracked. The authorities will work with the RERA authorities in this effort. 

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