Premium hike on FSI may throw TDR mkt into a spin: Industry

NM Gattu of DB Realty said the property prices will rise by 10-15 percent.

Below is the transcript of NM Gattu, Pujit Aggarwal and Gulam Zia's interview with CNBC-TV18's Menaka Doshi and Senthil Chengalvarayan.

Menaka: I am told there is an FSI premium announcement. There is an announcement that has to do with the development or the conversion of mill land to industrial land so to speak and there is something to do with increasing Ready Reckoner rates as well?

Zia: Most of these are regular announcements that keep coming in the Budgets. Unfortunately currently it has kind of coincided with the recent development plan (DP) changes that they have also brought in. So, currently there is huge amount of chaos all over because the new DP itself is not well understood and such changes in policy framework specially from planning angle bring in at least about an year or year and a half of interruption in the industry and that interruption would definitely mean that people will not be doing those transactions of buying land, selling land, TDRs, FSIs etc., that is the biggest worry.

Senthil: So, you are saying this Rs 5000 crore that the government is targeting will not happen?

Zia: I don’t think so because at least for year, year and a half I don’t see, especially in Mumbai. Mumbai all said and done is the biggest contributor to the real estate of the state. If Mumbai itself is passing through such a lull period then I doubt if they will be able to get this kind of money.

Menaka: Can you explain to us specifically what has happened outside of the DP and some of those issues we have spoken of earlier as well on the show? Can you explain to us what has happened on lets say the FSI premium front, what that means for builders, for home buyers?

Zia: When I read the Budget, whatever speech that was presented, it says that in different municipalities or municipal areas they would take a premium on the additional FSI that they give. Now at least in case of Brihanmumbai they are very specific that earlier it was 0.33 FSI that municipalities were collecting the money from developers or the guys who wanted to construct their houses, on the other side today they are saying that they will first of all increase that from 0.33 to 0.6 and then that will be charged on the current Ready Reckoner value. That 0.33 so far was charged at 2008 Ready Reckoner value which was very low in terms of what the current prices are. So, the intent is good. What they are saying is that instead of everybody else making money the government should also get money then in order to spend on the improvement of the state.

Menaka: I didn't get this 0.33 to 0.6, could you just explain that again?

Zia: In island city the FSI allowed was 1.3 and in the suburbs it was 1, with TDR it was going to 2 FSI . They jacked it up sometime back from 1 to 1.33 but that 0.33 was something which developer had to buy from the government instead of buying the TDR. Now they have made it to 0.6.

Menaka: So, now you can buy up to 1.66 but the rates for that 0.6 additional have been changed to new Ready Reckoner?

Zia: Correct, and the government will collect this. Two things, first implication is that the whole TDR market will go for a spin because earlier this area was bought from the open TDR market. So, that transfer of development right market will actually go completely berserk and government will collect that money which is a good intent. However as I said at least for year and a half I see huge difficulties.

Menaka: So, who will buy the TDRs then?Zia: That is the big problem because the new DP that has come up is also expected to infuse huge amount of TDR in the market. Menaka: Can you get FSI above 1.66 in the island city and for that would you then have to buy TDR?Zia: That is correct.Menaka: Is there a market for that much FSI?Zia: Currently the market is also going through a bad patch. That is the whole point. Currently the whole real estate market is not really very healthy with huge amount of fall in the absorption of housing dwellings, huge amount of fall all over and in such a situation coming up with these things will be far fetched. I don’t think the government will mop up so much of funds.

Menaka: What is this going to mean in terms of being able to price affordably if at all given the increase in rates and then what happens to the TDR market in the future?Aggarwal: My reading of the interpretation which Zia has mentioned is slightly different. One, what we are saying is that as far as the TDR is concerned the balance 0.6 I do have the option of using the TDR. So, in fact the TDR market is going to go up and there is a possibility that today the TDR which I am buying at Rs 4000 just as an example that will go up to Rs 6000 because my Ready Reckoner value of that 0.6 is Rs 6000. So, the TDR market is certainly going to go up and there is going to be a healthy TDR market even in the interim period. The second issue is that this particular impact is only in the suburban Mumbai which is beyond Bandra and beyond Sion because the TDR concept is basically there in suburban Mumbai and not in the island city.Menaka: So, let us say for instance Orbit is concerned, given that most of your properties are in South Mumbai, you stand unaffected by the Budget announcements?Aggarwal: That is right.Menaka: The impact on DB Realty?Gattu: We had analysed the impact from 71 locations from Bandra till Dahisar and on the Eastern Express Highway take it up to Mulund, so we have analysed each of the 71 locations as to what would be the impact. Earlier there was a base rate for the TDR which was linked to the 2008 Ready Reckoner rate. Now it is a direct multiplication to the current Ready Reckoner rate. So, the overall increase in the Ready Reckoner rates from 2008 to 2015 is about 150 percent during the entire period. At the same time the Ready Reckoner if you peg it from the then rate whatever it was 20 percent plus slabwise rate to linking it to the current 60 percent of the Ready Reckoner rate, the jump is almost about 4.5 times across locations. It goes up anywhere from – somewhere it is 3 times, somewhere it is 5 times. The impact on the per square feet basis if we were to look at it - in the normal calculation what happens is if you have a 100 square feet of land you get 85 square feet of base FSI free and 100 square feet that gets loaded as part of the TDR. Earlier 100 square feet used to come as a TDR, later subsequently it was modified to say 0.33, that is 33 square feet you can buy from the government at 2008 rates and the balance was market determined. So, if I were to just look at various locations like Bandra, Andheri, Malad, Borivali, Dahisar and take the differential of the rate because earlier lets say as an example that in Bandra the TDR rate of 0.33 which from the government which is being purchased was Rs 2200, the market TDR was around Rs 3500. So, now the same Rs 2200 has gone up to Rs 10600 per square feet which you have to buy from the government. The local TDR may also catch up with that but today's rate is around Rs 6000. So, both the TDR rate prices have gone up as well as the FSI rates also have gone up.Assuming that what will be the impact on this on a per square feet, on an independent basis is about Rs 2000 per square feet. If Rs 2000 per square feet of saleable area has gone up as investment for any developer 2 times the investment money is the return that they would immediately look at. So, if you look at it that way the prices everywhere from Dahisar till Bandra will go up anywhere in region of 12-15 percent.Menaka: This only applies to new projects, right?Gattu: Anybody who is going to buy now. The prices have already gone up.