The increase in FSI premium and ready reckoner rates is a negative for the industry, which may lead to 5-10 percent rise in property prices in the near-term, says Sarang Wadhawan, vice-chairman and managing director of HDIL.
According to him, builders are likely to pass through the complete increase.
Below is the transcript of Sarang Wadhawan's interview with Latha Venkatesh and Sonia Shenoy on CNBC-TV18.
Sonia: We were speaking with the CFO of your company just a while back and he did indicate that this increase in the rate of premium for developers comes in as quite a bit of negative. What does this actually do for your own company because you do a lot of transferable development rights (TDR) as well? Does this mean that premium floor space index (FSI) becoming expensive will cause developers to go in for more TDR?
A: Definitely, it seems so but the fact of the matter is that the company is not just engaged in TDR projects but also other projects where it does require purchase of FSI. Although we do utilise our own TDR for projects, overall where this increase in FSI is concerned and the increase in the ready reckoner value is concerned, it is a negative for the real estate industry.
However, I also think that the government is trying to garner funds from somewhere. It is just that the sector itself is reeling in from huge pressure currently. We will have to wait and watch if the developers have that kind of money that the government expects them to put in.
Latha: What exactly will be the premium, have they mentioned that?
A: The components that have changed is that the FSI that you could buy from the government has increased from 0.33 to 0.6. Also, the ready reckoner value premium has changed to 60 percent of the ready reckoner value as per 2015.
Earlier it was linked to 2008 where the prices were much lower. Every year since, you have seen that the ready reckoner rates have increased by 15-20 percent which basically means that the premium has become a lot more expensive than what it was in 2008.
Latha: How much of it can builders pass on you think?
A: I don’t think any developer is going to keep this cost to himself. It is going to get passed on to home buyers. So, what you are looking at is that property prices will increase and they will increase substantially from hereon.
Latha: Can you give us a number, even a ballpark or range say for Central Mumbai?
A: It depends from area to area; it depends on the ready reckoner value so it is very hard to benchmark a particular percentage of increase in value. However, overall if you were to look at it from a 30 percent to 60 percent offered 0.33 component we are looking at least a 5-10 percent increase in prices right now.
Sonia: There is a proposal to charge a premium fee linked to the market value of land for change in the purpose of land so to convert industrial land to real estate projects. Would that in any way impact you and if it doesn’t what about the industry as a whole, how much will the conversion rate rise?
A: Most of the industrial lands that were present in Mumbai city have already been utilised or converted into residential or commercial areas. There are a couple of other pieces which have just come out in the market and which have been bought over, they are up for conversion.
I think it is a step a little too late. If this would have been done in 2008 then the government would have earned a lot of money from this. However, with the industrial conversions already completed I don’t foresee the government making too much money out of this.
Latha: Companies like Raymond, Bombay Dyeing, Godrej importantly are not going to be impacted, it is all converted?
A: Some of them are, some of them haven’t.
Sonia: On supply, given what has come out of the Budget how do you see the supply situation pan out?
A: I think a couple of projects in Mumbai city because of the want for capital will get held up if they do not have the approvals in place. However, most of the people have already taken approvals and also the fact of the matter is that the draft development plan (DP) is in place right now. So, that is going to have a huge impact on the governments revenue gathering momentum because with DP not in place the BMC is not going to allow approvals to be given which means that all this premium and FSI talk which is happening currently will be skewed over a period of time; it is not going to happen right away.
Latha: How is the demand position now and with this 5-10 percent loaded on will it decrease further?
A: The demand position is currently good. I still think that the inventory is moving but at the same given time the policy by the government - and people are waiting for execution. Let us be very honest, people have burnt their hands over period of time where developers have taken bookings and have not executed projects. We on the other hand are executing all our projects currently and that is why we are seeing movement of the inventory. If that continues, the demand will continue to be there.
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