Teji Mandi: Why is the premium cut vital for Mumbai's real estate?

The Maharashtra government has reduced premiums on the real estate sector by 50%. It will be applicable till 31 December 2021. The projects that absorb the full stamp duty for customers will be eligible to claim these benefits.

The government's decision is based on the recommendations of the Deepak Parekh committee. It has come at a time when sentiments are improving and homebuyers are back in the market.

The government had set the ball rolling with stamp duty cut back in September. Since then, the new registration count has increased from 79,400 in August to 1.14 lakh in September and 2.43 lakh in December across Maharashtra. In Mumbai, the count increased from 2,600 in August to 5,600 in September and 18,854 in December 2020.

Cutting the premium charges would further propel this rising momentum.

What is a premium?

In Mumbai, given the scarcity of land, the developers need to maximize the utilization of space. The builders often need to use more space than what the typical FSI (Floor Space Index) calculation would allow them. To get approvals for utilizing the extra floor space, they need to pay additional fees to the authorities. These charges are referred to as a ‘Premium’.

The state government applies various charges during the various phases of a project. It could include the premium paid for FSI (floor space index), open space deficiency premium, premium for more ground covered for construction, lobbies, lift wells, and staircase premium among others.

Where does it hurt?

The Deepak Parekh committee, in its report, pointed that Mumbai collects as many as 22 premiums under various categories. These premiums add up to 30-33% to a project cost. The premiums are significantly higher than any other city in the country. For instance, there are 10 different premiums in Bengaluru, five in Delhi, and only three in Hyderabad.

The benefits of the cut:

The premium cut will significantly reduce the financial stress on a developer. It will improve their cash flow and speed up the stuck projects. More importantly, it will bring the overall cost of the project down.

It will also incentivize new launches, thereby creating jobs. And, translate into lower housing costs which will benefit home buyers.

Closing comments:

The efforts of the Maharashtra government are truly paying dividends. The stamp duty cut and lowering premiums have gelled well with low-interest rates. The combined effect has made this one of the best times to buy a home in Mumbai.

It has started to turn the fortunes of Mumbai's real estate space. At the same time, it has set a template for other states. Especially those coping with high unsold inventory and stalled projects.

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Free Press Journal