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MUMBAI: A blanket reduction in new home prices may be far more modest than expected despite the Maharashtra government’s decision to halve construction premiums in 2021.

Most developers welcomed the government decision but shied away from estimating its final impact on property prices saying the lower premiums will only apply to select new launches and that the benefits won’t be uniform.

“We need to keep in mind that not all premiums are availed by all projects; so the impact (on home prices) will differ based on how many of the premiums are availed," Niranjan Hiranandani, managing director, Hiranandani group, said.

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“One cannot just look at advantages because of premiums being reduced and overlook the enhanced cost as a result of input material costs," Hiranandani added.

Construction premiums are paid by developers to various government bodies such as local municipalities and environment regulation agencies for additional building space.

In Mumbai, for instance, where land is scarce and expensive, and the floor space index (FSI) allowed by the local corporation is low, developers pay exorbitant premiums to buy higher FSI and build skyrises.

Last week, the Maharashtra government said it would cut the cost of these building approvals by half, provided developers absorb the cost of property registration taxes and don’t pass it on to buyers.

Developers say rising steel and cement prices are making construction more expensive this year, which will eat into the benefits of lower premiums in new projects. Mumbai has unsold inventory of 260,000 homes, where the benefits of lower premiums won’t apply.

“Plus, one needs to factor in the aspect of stamp duty to be paid by the developer, which will impact the net gain across the project’s total costing. How much the net benefit to the buyer will depend upon each project’s cost arithmetic," Hiranandani said.

According to Anarock Property Consultants, a developer in Mumbai spends about a third of an overall project cost towards various premiums.

Mumbai has as many as 22 such construction premiums, with a few like the fungible FSI, open space deficiency and land under construction charges making up 60-70% of all premium expenses.

This is significantly higher than Bengaluru, Delhi and Hyderabad which have 10, five and three different premiums respectively. This makes owning a home unaffordable for the average Mumbai resident, with average property prices hovering at 17,845 per sq ft in December against 4,955 in Bengaluru.

“We intend to pass on the benefits accrued from the reduction in construction premium to our customers from February," Krish Raveshia, CEO, Azlo Realty, told Mint. “The revised premium on construction will be based on ready reckoner rates of 2019 and 2020, whichever is higher. As per our preliminary calculation, the relief which we intend to pass on works out to around 7-10%, primarily (saving of) up to 5% on the stamp duty expenses and another 3-5% in actual price reduction." Azlo will launch a new residential project in Chembur, an eastern suburb later this year, where the price reduction will apply.

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