FSI is an important term in the Real Estate Industry.
What does it mean? FSI (Floor Space Index) refers to the buildable area on a plot of land.
Thus, an FSI of 2.0 would indicate that the total floor area of a building is two times the gross area of the plot on which it is constructed, as would be found in a multiple-story building.
An FSI of 1 means that the area of construction should be equal to the area of the plot—for example, a plot of 50,000 sq ft can only have a built-up area of 50,000 sq ft and no more.
Recently the Maharashtra Government has hiked the rate of premium FSI that builders purchase from the state department.
What would be the implications of such a decision on the Real Estate Industry in India?
I would like to discuss a few key points.
Maharashtra at present is saddled with a debt burden of about Rs2.85 lakh Cr which is expected to touch Rs 3 lakh Cr by March 31
So the clear reason behind such a decision is to boost the government's depleting coffers.
They will now link the premium to be paid by developers for the 0.33 extra FSI to ready reckoner rates of 2015 as against current base of 2008 rates. An estimated Rs 7000 Crore is expected to be earned from this sale.
The most adversely affected type of Real Estate Projects by this decision are redevelopment projects.
Redevelopment Projects are where builders approach existing residential projects and recreate new structures in their place with a higher capacity allowing them to earn revenues via the increased capacity and increase in the Market price of that property.
For redevelopment projects builders buy premium FSI from the government allowing them to buy FSI at a cheaper rate.
But with a hike in the premium FSI rates, profitability for Real Estate builders is now under attack.
In a sluggish property market where prices are weakening, a rise in cost for developers is bound to hit their margins. This is expected to see less number of developers coming forward for smaller redevelopment projects
Who will bear the brunt?
As always in this Consumer Vs Seller world, there are only 2 possible outcomes.
An increase in the cost paid to the government will translate into a hike in selling prices. An increase in prices in an already highly price sensitive market will discourage buyers from buying.
Or else Builders will have to bear the brunt of this decision with lower margins, further lowering their inclination towards developing new projects. Developers are likely to renegotiate the old redevelopment agreements where construction is yet to start, as builders will be interested in reducing the compensatory benefits, including extra space for tenants.
Although this is a going to be decision that few will appreciate , I hope to see a few positive decisions soon.