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Home >Money >Personal Finance >50% cut in construction premium by Maha may result in property price correction
Experts believe the reduction in premium may help developers in reducing the price as it will reduce their working capital requirement as well as cost of project. (Mint)
Experts believe the reduction in premium may help developers in reducing the price as it will reduce their working capital requirement as well as cost of project. (Mint)

50% cut in construction premium by Maha may result in property price correction

  • Construction premiums are the charges collected by the state government under various heads, including floor space index, staircases, lift well, and lobbies.

As per a note shared by ICRA, 50% reduction in construction premium leaves a scope for around 4.5% price correction with the developer in Maharashtra.

In order to boost the real estate sector, which is grappling with high inventory and poor sales, last week, the Maharashtra government had reduced the construction premium by 50% till 31 December. Construction premiums are the charges collected by the state government under various heads, including floor space index(FSI), staircases, lift well, lobbies, etc. However, experts believe this reduction in premium may help developers in reducing the price as it will reduce their working capital requirement as well as cost of project.

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“Construction premiums typically amount to around 10-15% of the selling price, as against stamp duty which, incorporating the recent reductions, amounts to 3% of the selling price till March 2021 and 5% thereafter. Thus, even after payment of stamp duty on behalf of the buyers, the developer would still gain by up to 4.5% of the selling price, which would result in improved project viability and may result in equivalent price correction in the state," said Shubham Jain, senior vice president, corporate ratings, ICRA, in a note shared on Maharashtra real estate market.

In order to avail this benefit, the developer is to bear the cost of stamp duty on the behalf of the homebuyer. However, as the Maharashtra government has reduced the stamp duty charge by 2-3% in August, till 31 March 2021, the burden will be lower, leaving scope for further price reduction.

As per the Deepak Parekh committee, as on date there are as many as 22 premiums collected in Mumbai under various heads, including FSI, staircases, lift well, lobbies, etc. This is significantly higher than other cities in the country.

This measure along with the stamp duty reduction is expected to boost the real estate market of the Mumbai Metropolitan region which has been severely impacted due to covid-19.

“Sales in this region declined by 39% year-on-year during 9M FY2021, as against 35% pan-India. Even during Q3 FY2021, sales for this region remained 16% lower than the corresponding quarter in the previous fiscal, as against pan-India year-on-year de-growth of only 7%," said Jain.

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