MC Explains: Will real estate prices in Mumbai drop following government’s decision to cut premium charges?
MC Explains: Will real estate prices in Mumbai drop following government’s decision to cut premium charges?
The Maharashtra government last week said that it is considering a reduction in premiums paid by developers in the Mumbai real estate market. However, experts opine that developers should pass on the benefit to homebuyers to enhance affordability.
The Maharashtra government had on January 6, 2021 approved a proposal to cut the premium for the Mumbai real estate market by half till December 31, 2021. However, the condition was that developers availing of the scheme would have to pay full stamp duty and registration charges on behalf of homebuyers.
Maharashtra Housing Minister Atul Save had last week said that the state government would consider reducing premiums paid by developers for approvals in the Mumbai real estate market. Real estate developers have maintained that the move will make real estate more affordable in India’s costliest real estate market, Mumbai.
While the Maharashtra government had reduced the premiums paid by developers to 50 percent two years back, experts are of the opinion that the benefit if extended in future should be passed on to homebuyers by the developers to ensure better affordability.
What are premium charges?
There are different types of premiums levied by local authorities in Mumbai to approve construction limits or additional construction for a particular project. In Mumbai, there are 32 types of premiums that a developer ends up paying to the authorities. Around 20 to 30 percent of the project cost goes towards these premiums, say real estate developers.
The apex body of real estate developers in Mumbai—Confederation of Real Estate Developers’ Associations of India (CREDAI) and Maharashtra Chamber of Housing Industry (MCHI)—has requested the state government to rationalise the different types of premiums developers pay in Mumbai, which is one of the reasons behind Mumbai being the costliest real estate market in India in comparison with other cities, hampering its economic growth.
A report by CREDAI-MCHI has noted that due to the burden of premiums there is a significant challenge that developers in the Mumbai Metropolitan Region (MMR) region face.
“These premiums include Floor Space Index (FSI), staircases, lift wells, lobbies, and other Premiums that significantly increase the cost of development. These premiums, coupled with other challenges, such as high land prices, make housing unaffordable for a large section of society. We believe that working with the government authorities to rationalise these premiums can make real estate more affordable for all segments of society,” CREDAI-MCHI said in a report.
According to the apex body, property prices in Mumbai are the highest compared to any other Indian city.
In its report submitted to the Maharashtra government, the apex body has stated that the prices in MMR are nearly double of Delhi-NCR and Bengaluru. It said that the average cost of an apartment in MMR is Rs 19,485 per sq ft whereas in Delhi NCR and Bengaluru, it is Rs 9,266 and Rs 8,035, respectively.
Also read: Maharashtra may cut real estate premiums: State Housing Minister Save
Did homebuyers benefit from reduction in premium charges in 2021?
The Maharashtra government had on January 6, 2021 approved a proposal to cut the premium on real estate projects by half till December 31, 2021. However, the condition was that developers availing of the scheme would have to pay full stamp duty and registration charges on behalf of homebuyers.
“The absolute positive effect of 50 percent premium waiver in 2021 was on account of more supply leading to more competition. More choices were available to buyers at a given price in 2021 and 2022. Due to this, the price hike was 5-7 percent in a city like Mumbai,” said Ritesh Mehta, Senior Director and Head, West and North, Residential Services and Developer Initiatives, JLL India, a real estate consultancy firm.
He added, “Going forward, the government can link sales and premium reduction to ensure that homebuyers are benefited. We can have a policy where closing of sales in a timebound manner is pledged by developers to ensure that the scope of discounting increases. This will ultimately benefit end homebuyers.”
“The Maharashtra government gave 50 percent discount in premiums in 2021 when the market was coming out of distress amid the pandemic. Along with this, reduction of stamp duty propelled growth in the housing sector. Post this, the government also realised that due to the reduction, government revenue actually increased,” said Pankaj Kapoor, Managing Director of Liases and Foras, a real estate consultancy firm.
“I am of the opinion that premium waiver does not lead to increase in price despite the developers paying the stamp duty on behalf of homebuyers. If we look at the data of the top eight cities in India, MMR has shown the least increase in price of homes in the last two years. I think the reduction in premiums may help in affordability for homebuyers, but in no way will it increase the price of homes in Mumbai,” he added.
Developers speak
“We are very clear and have already informed the state government that developers will pass on the benefits of reduction in premiums to homebuyers in various ways, including absorbing the stamp duty charges of the homebuyers if the state government rationalises the premiums. When we absorb the stamp duty on behalf of homebuyers, we are bringing down the apartment cost by 6-7 percent,” said Keval Valambhia, Chief Operating Officer (COO) of the apex body of developers-MCHI.
“Now, there is always an argument that if the premiums are reduced or rationalised, the developers will pay the stamp duty on behalf of homebuyers, but ultimately will adjust the per sq ft apartment price and increase the rate,” he added. “But my logical point here is how can developers suddenly increase the per sqft rate? This is simply not possible in an open competitive market. More than the developers, market forces will play a substantial role in reduction of home prices if the premiums are rationalised.”
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