There is a strong pitch to increase Mumbai‘s permissible floor space index (FSI) considering the space crunch in the city. Experts discuss pros and cons og higher FSI.
There is a strong pitch to increase Mumbai's permissible floor space index (FSI) considering the space crunch in the city. Housing Minister has also recently called for reviewing FSI limits. Sources have told CNBC-TV18 that a draft guideline to increase FSI limit to a blanket allowance of four is in-the-making so far as redevelopment projects are concerned. FSI limit was set at 4.5 in Mumbai when introduced in the 1960s. Since then of course in every global city, be it Tokyo or Hong Kong FSI norms have been relaxed, but in Mumbai quite the opposite has happened. So while in New York, Tokyo, Hong Kong and Shanghai FSI limits range between 10 and 15, here in Mumbai the permissible FSI range between 2.5 and 4 for redevelopment projects and between 1.33 and 4 for non-redevelopment projects.
To discuss the pros and cons of having higher FSI in Mumbai we have Anuj Puri, Head of Jones Lang LaSalle and Sandeep Runwal, Chairman of Mumbai-based Runwal Group.
Q: The major reason why prices do not correct in Mumbai supposedly is because demand outstrips supply. Will a higher FSI regime then address this supply constraint to some extent and what impact do you think it can have on prices?
Puri: Higher FSI is really good from the perspective of bringing more supply into the market and the way that this works is that on a given piece of land you are allowed to construct more. If you were to look in the city of Mumbai maximum cost escalation that is coming in the sale price of projects is because of the higher land cost. Now on the same land if you are able to build more, as a result of it, per square feet price will start to come down and that will really help the buyer. Because majority of the cost that is reflected in residential buildings is the cost of the land and now on the same piece of land if you are being able to build more FSI it will automatically bring down the cost on a per square feet basis, which hopefully should get reflected in the reduction in the sale price.
Q: Let me then turn to the developer, Sandeep, but the benefit of this regulation could be passed to the consumers in terms of more rational prices maybe, but recently we have seen that the new Development Control Rules (DCR) guidelines were implemented and it was touted to be so consumer friendly, etc. But all that the new DCR guidelines have actually achieved is one that launches have dried up in the city and two prices have gone up?
Runwal: This is typically an issue, every time we have a change of guard, either a new Chief Minister or a new Municipal Commissioner. You have to adjust and realign your entire strategy and launch of your project based on this new rules and regulations. Even when the fungible FSI has brought in transparency, it has come at a very high cost. If you are going to link ready reckoner rates to the cost of purchasing FSI and increase ready reckoner rates every year by 30 percent, the end user is always going to pay 30 percent more. The developer’s margins are fixed. He is not making more than 18-20 percent. So where does the extra burden go, how can he bear it? So, the moment you link cost of this four FSI to any ready reckoner rate, the cost will not come down for end user, the purpose will be defeated.
Q: You are saying Sandeep that developers cannot take a margin hit, but increasing supply of houses will also of course mean upgrading current infrastructure capabilities. So, who according to you will need to bear this cost?
Runwal: The cost which they should levy for this FSI should be only the cost needed to raise enough money for the infrastructure to be provided for this FSI. If the government says we want to increase Mumbai FSI to 4, corresponding to 4 what is the infrastructure they need? And accordingly they should price the FSI, and then it will work. Because then you are able to provide a good quality of living to the people who will come into the city. I am not saying give it free to the builders because the money will then get passed on to the land owners.
Q: Anuj, while we are still speaking about infrastructure and especially since both of us commute to a very choked commercial hub like Lower Parel every single day, do you think that developing infrastructure will be the key challenge while implementing higher FSI in Mumbai?
Puri: First one that is going to be required is really to put in the infrastructure because you cannot have a higher FSI being allowed in the same locality, suburb, or a micro market where the infrastructure has not been correspondingly put to take on the extra load. We took the example of Hyderabad, the infrastructure that has been put in place is just outstanding, whether it is the roads, sewage, water drainage, power, and transportation, all that was first put in place and then the higher FSI was granted. I think in the city of Mumbai we will need to be very careful. We need to look at how we are going to upgrade the infrastructure in areas where higher FSI is going to be granted because if the infrastructure does not come through, I think it will become just a nightmare to live in the city of Mumbai.
Q: Let me throw that question to you, Sandeep. You have a strong suburban presence. Should the cap of FSI be raised, will you consider a project in the island city, say, Lower Parel or Mahalaxmi, and if you really do so then what kind of challenges do you envisage in such a project?
Runwal: It is a very good point, which you are making is in terms of the road traffic and infrastructure. If you start an infrastructure project which was to get commissioned in 2001 or 2002 and it gets delayed by 10 years. Obviously, the population has grown, the cars have grown, everything has grown and then you feel the burden of the infrastructure immediately. If infrastructure projects are planned way in advance you can see typical cases Bandra-Worli sea link, you can see the Nhava Sheva trans link to Alibaug, you can see the metro is running behind schedule. If all projects run behind schedule like this, it is all going to pile up at one point of time. Also, when you plan a city, you don’t have areas designated as commercial hubs and as residential hubs, you have commercial hub mix, you have residential hubs mix, you have malls mixed in the middle of everything . If we were to do a project in redevelopment in Lower Parel I think it will be very exciting, but the infrastructure again, the sewage lines have not been changed for the last 50 years, so if you do not change and implement these things you are going to see all of this crumble at some point of time.
Q: What kind of impact do you think this kind of a higher FSI regime in fact will have on redevelopment projects as well as for joint development agreements? Will more developers come forth and take up redevelopment projects and joint developments are already invoke, so will that see some increase traction? What is your opinion on that?
Puri: Increase of the FSI is definitely going to be a big benefit both on the redevelopment side as well as for the joint developers, because clearly there you are going to be able to construct more on the same piece of land. So, for example, if you were to take in the island city of Mumbai, nearly 70 percent of the cost is really the cost of the land. Now, if in the same land you are able to do double the FSI, suddenly you can bring the cost on a per square feet basis to half, which means clearly you can construct more on that piece of land and there is more both for the developer as well as for the land owner.
In many of the cases the joint development was not working because the expectation of the landlord for the land parcel was far higher than what the developer was going to be able to construct. Given that there is going to be more, that you will be able to construct on the same piece of land, there is going to be a lot more available for both the parties as profit and hence that will prosper the joint development.
The same scheme applies to the redevelopment as well. In some of the older societies you are only going to be able to develop much lower FSI and hence the developer are not keen to take the entire redevelopment because there is not enough buildable area left for free sale. Now if the FSI increases he can rehabilitate the people who are living in that particular society and have more buildable area still left for free sale. Thus, on the redevelopment side there would be a lot more developers wanting to look at it.
There is no denying that if Mumbai needs to be the next Shanghai, buildings have to grow vertically. But changing development capabilities is not the only answer. As our experts have pointed out, more important is that infrastructure planning goes hand-in-hand with superior urbanisation.Subscribe to Moneycontrol Pro and gain access to curated markets data, exclusive trading recommendations, independent equity analysis, actionable investment ideas, nuanced takes on macro, corporate and policy actions, practical insights from market gurus and much more.