The Maharashtra government has given a New Year gift to the ailing real estate industry on 5th January by approving a reduction in premiums and levies on construction by 50 percent till December 31, 2021 as recommended by Deepak Parekh Committee. It will be applicable on all ongoing and new construction projects. Earlier, the government reduced stamp duties, under the Development Control and Promotion Regulation 2034, in the state from 5 to 2 percent until December 31,2020, which will now continue till the end of March. All project developers, who want to avail the scheme will have to pay full stamp duty and registration charges for the customers till the end of this year. It is expected that the property prices will drop sharply in Mumbai after that. Real estate sector hailed the decision, saying reduced premiums will lower development costs to developers and help avoid project delays due to funding reasons. Also, lower purchase cost to homebuyers will in turn result in increased demand. SURFACES REPORTER (SR)’s story analyses: What does reduction in premium mean?  And how do reduced premiums impact property prices, government revenue generation, and new and on-going projects. Scroll down to know:

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What does a Premium Mean?

Premium is mainly multiple charges that are levied by the state government to make approvals for initiating, progressing, and completing the area or additional area in a real estate project. Developers generally bear the premium reduction and stamp duty charges that will lower the cost for homebuyers. Also these premiums (premium paid for FSI-floor space index, lift wells, staircase, lobbies, open space deficiency premium or others), cess, or levies are paid to the municipal corporation. 

How This Decision Will Impact the Real Estate Developers and Home Buyers

Mumbai is the city of hope and ambition. It is a city that never sleeps. And more and more people search for options to buy a property in this land of dreams. But, the realty of real estate sector here is that Mumbai is India's costliest housing market.

It is known for its compact houses with the skyrocketing property prices. The property demands are high. Besides, it is difficult to buy land here. The way out builders found is to go vertical and construct more. And to achieve that, real estate developers tend to build more than what the FSI (Floor Space Index) calculation would allow them. So, they need to pay a premium to the authorities in order to get approvals to construct that extra area.

Mumbai Pays Highest number of premiums compared to other cities

In Mumbai, realty players have to pay 22 premiums, which is higher than the premiums paid by any other top metro cities. For instance, In Delhi, developers have to pay 5 premiums, in Bengaluru 10 while in Hyderabad just 3. Higher premiums put extra financial burden on builders leading to soaring property prices.

The current decision by the government has been taken to boost the realty sector that has been badly affected by the COVID-19 Pandemic and economic downturn.

"It will give a big respite to the developers, as the cost of premium as well as approval cost contribute 35 to 38% of the project cost, whereby the project cost will come down substantially, “ Mr. Ashok Mohanani, President, NAREDCO Maharashtra

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What will be the Impact of slashing premiums On:

New Projects

The move is considered to expedite the ongoing project completion process and will allow developers to come up with new projects.

“After the steep, temporary reduction in stamp duty charges, the 50% reduction in premium payments until December 2021 will benefit the supply side immensely. It will also help developers pass on further benefits to homebuyers, invigorating demand for real estate projects that are under construction. This move is likely to propel developers to offer extended payment holidays and also give lucrative price proposals to buyers in projects  where the inventory has been selling slowly. While the pandemic and subsequent lockdowns made developers focus on completing existing projects and largely postpone launching new ones, this move of halving the different kinds of premiums and levies is going to make developers contemplate going back to launching new projects. So, it’s the much asked for and required icing on the cake for the real estate sector, especially in the state of Maharashtra,” said Mr. Kaushal Agarwal, Chairman, The Guardians Real Estate Advisory

“After the stamp duty cut, this decision of the Maharashtra Government to cut premiums by 50% is a masterstroke. This will give a much needed impetus to the real estate industry in the State. We will see a very positive response from the developers and the stakeholders,” Mr. Bhushan Nemlekar Director, Sumit Woods Limited  

“The industry applauds this booster dose making many projects viable and we shall adhere to the rules laid down in lieu of availing these benefits. Also, the reduction in premiums for new launches will help the development at the lesser input cost and over a period of time there is a possibility of lower price for new inventories that shall come into the market,” said Niranjan Hiranandani, president NAREDCO.

''After being hit by the pandemic, the real estate sector has seen a solid recovery on the back of stamp duty reduction and a good festive season. Now this move of reduction in premiums by 50% will help rationalize input costs for the developers and will go a long way in expediting project completion thereby keeping price escalation in control. The industry will also witness new launches in the market attracting investments from institutions. All in all a good move that will sustain the growth of the real estate industry in the coming months,'' Mr. Abhishek Jain, Chief Operating Officer, Satellite Developers Private Limited (SDPL)

Also Read: Self – Redevelopment – the Future of Mumbai Real Estate

Government Revenue

Reduced premiums mean the government would take in less revenue, so to some extent this would be compensated for by the rising property constructions in the city.

"I feel that even the revenue of the State Government and the Corporation will increase because of this decision. This will also ensure a positive momentum going into the New Year after an effective last quarter for the industry on the back of lower interest rates, reduced stamp duty and festive offers by developers, ”explains Mr. Bhushan.  

“The state government will also generate more stamp duty and registration revenue from increased housing sales,” explains Puri.

Property Prices

While there are many factors responsible for Mumbai’s high property prices, the hefty premium that developers have to pay to the government is one of the prime reasons. Reducing the premiums will allow builders pass on the cost benefit to property buyers.

“The reduction in the construction premium on real estate projects by 50% till December 2021 is a significant decision taken by the state government to boost the real estate sector. The decision coupled with reduced stamp duty cost would help the sector to witness accelerated sales due to the feasible home prices in the upcoming time. It would incentivize the purchasing decision of the homebuyers and boost the residential real estate demand, “Mr. Kamal Khetan, Chairman and Managing Director, Sunteck Realty Ltd

“We are confident that this move will expedite the economic recovery of Maharashtra with more than 250 allied industries dependent on the real estate sector, which will also generate widespread employment. The premium reduction, coupled with the stamp duty charges which will also be borne by the developers, will lead to reduced cost for homebuyers thereby increasing their purchasing power - further underlining the opportune time for them to buy a house in MMR,” said Deepak Goradia, president, CREDAI MCHI.

“If these premiums are slashed, the government will obviously have to ensure that the resulting cost benefit is passed on to homebuyers. However, developers may not need much encouragement to do so as they are themselves eager to increase sales via improved affordability,” says  Anuj Puri, Chairman – ANAROCK Property Consultants.

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