Quite an interesting development to note in Maharashtra is the changes made to the reduction in premium for the real estate projects up to December 2021. Real estate can be considered as a barometer of the health of the economy. Growth in real estate not only generates direct and indirect employment, but also helps various ancillary industries. Going by reports from IBEF, the sector’s contribution might reach 13 percent of the Indian GDP by 2025.
In the face of common issues like construction and possession delays, difficult liquidity and a growing inventory, the coronavirus pandemic was not an easy load to accommodate. Sudden switch to a work-from-home model and other strategic dimensions like preference to own over lease, increased digitization, and search for peripheral affordable locations have also impacted the real estate industry.
In the face of this, the reduction of the stamp duty in Maharashtra has helped arrest the fall in demand in real estate – both commercial and residential. It was a pivotal catalyst for higher sales in two key markets -- Mumbai Metropolitan Region (MMR) and Pune during the last few months of the past year. This trend is likely to continue as the stamp duty cut is applicable until March 2021.
The Maharashtra cabinet has approved 50% reduction in premium for real estate projects under the new DCPR (Development Control and Promotion Regulations) rule 2034 across the board for on-going and new projects up to December 31, 2021. This includes concessions in the premiums levied by all planning authorities/local administrations in the state.
Builders will have to pay premiums based on the 2019 ready Reckoner (RR) rates or the 2020 rates, whichever is higher, and those who opt for the 50% reduction in premiums will also have to pay the entire stamp duty when they sell flats to buyers by giving an undertaking to the local bodies. Right now, the FSI premiums/fungible FSI and payments for other concessions amount in the 25-33% range of the overall project (land inclusive), as per ICICI Securities.
The reduction will be instrumental in helping the real estate industry in a major way. While expediting project completion, there will also be new launches in the market. A lesser input cost will help in the development time. With the reduced cost of premiums, developers can pay the entire approval cost upfront and potentially launch new projects at attractive prices owing to the cost savings.
In 2020, while the government was wary of the spread of the pandemic, measures were still being taken to ensure businesses has a decent way of bouncing back to normalcy. The real estate market of India being one of the pallbearers of the economy, it goes without saying that the focus on getting the metro cities back on track in terms of demand is of utmost importance. That apart, other areas will also be seeing a substantial increase in demand for CRE, with employees choosing to stay closer to home. We could be seeing offices and work locations popping up on a hub-and-spoke model where possible. Consolidation of workforce into a single location will remain a priority for businesses that require minimum in-person attendance at work. Manufacturing, pharmaceuticals, security, hospitality, healthcare will see major shifts in the way work is done, where physical presence is mandatory.
What this move by the Maharashtra government will ultimately lead to, is yet to be fully experienced. However, with the growth of the real estate sector, investment opportunities will also gain traction. Commercial real estate is the asset class of choice for long-term investors and HNIs given the stable rental yields it commands in urban metros. As per a Knight Frank India report, the office sector continues to be investors' favorite due to the strong fundamentals of the Indian office market. The segment has managed to attract nearly USD 15.4 billion of equity investments since 2011. In the year 2020 (YTD) alone, the CRE segment accounted for almost 81 percent share of total PE investments. Strata will be keeping an eye on the same as well, so make sure you follow us on social media for any ripe updates.