Why reduced premiums on commercial real estate will create more jobs in Mumbai? 

Ramesh Nair, CEO & Country Head, JLL India

Last week the BMC announced that they may consider lowering premium for extra FSI. This comes as a very positive move for the Real estate market in Mumbai, where the cost of getting a permit is very high as compared to other parts of India.

When the new DP was announced for Mumbai, developers rejoiced on account of the additional FSI that was allocated to them. A range of additional FSI between 30% to 80% of the ready reckoner rate was proposed under various policies, such as 30% under the Fintech policy, 80% under commercial linked to roadways, and 60% as fungible that is applicable over and above. This was a welcome news for the commercial real estate sector as the new FSI norms was expected to create significant commercial spaces.

However, the announcement came with its own challenges. The FSI premium such as Govt. Premium FSI, fungible FSI, development charge and surcharge, staircase premium, open space deficiency premium, LUC Tax etc. are linked to ready reckoner and collectively form a significant percentage of project cost in Mumbai. Individually each premium item appears like it has been right priced by Govt. However, the sum of all of these may many a times add up to the market value of land in prime commercial areas. This is a challenge especially for the commercial real estate sector, as most of the taxes are payable upfront which make project capex heavy right at the beginning.

Such a high capex requires large equity or debt investments upfront. This significantly reduces the attractiveness of the project in term of IRR or project return for the investors.  What is also important to note for a commercial project is that, unlike residential projects that have pre-launches and sales, a commercial project more than often generates sale or lease revenue only towards the completion or post completion of the project. As very few developers have the financial capability to invest large capital without a return for 3 to 6 years, it is far more challenging to undertake a commercial project.

Though the increase in FSI proposed in the just released DP is welcome, it also implies that the size of project will significantly increase, as the developers will have to go taller in order to consume the additional FSI. A well know industry thumb rule is that once a building goes beyond 16 to 20 floors, the construction cost increases exponentially, implying an increased time as well as cost for completion.

Commercial Real Estate development is one of the key drivers of a social ecosystem. Not only does it directly generate jobs, but it contributes towards the development of a social infrastructure around the commercial project, leading to creation of residential catchments as well.

Looking at these factors, it is important that the Govt should rationalise the premium costs. This will enable developers to create more commercial projects that will ultimately help achieve the Govt’s objective of creating affordable commercial space that will lead to job creation and much needed economic activity in the city.

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