According to India Ratings and Research (Ind-Ra), the reduction is likely to result in around 7% reduction in all-in prices in Mumbai. The all-in prices in the rest of the state are likely to decline by about 2.8% and the overall impact on demand is likely to be correspondingly lower.
Example || Let us say a flat had a cost of construction (including land) of Rs 100. The buyer would have paid Rs 125 for the flat after accounting for the 25% EBITDA mark-up for the builder. The buyer would have then paid Rs 6.25 as stamp duty (after full 5% stamp duty came into effect after 31 March 2021), resulting in all-in price of Rs 131.25 and builder advertised price of Rs 125.
In the new world, the cost of construction is likely to decline to Rs 91.2 to reflect the around 8.8% reduction in the cost of construction due to lower premiums. Let us assume that the builder will still get Rs 25 as his mark-up fee. If the builder is going to pay Rs 5.81 as stamp duty (5% of Rs 91.2 + Rs 25), he/she is likely to add the same to the base price of the flat. This is likely to result in an all-in price of Rs 122.0 and the builder advertised price of Rs 122.0. This is likely to result in a 7.0% reduction in all-in cost for the buyers while resulting in a 2.4% reduction in the builder advertised price. ||
Ind-Ra estimates the 50% reduction in premiums would reduce the cost of flats by roughly Rs 750 per sq ft in Mumbai while having a more modest reduction of Rs 150 per sq ft in the rest of the state.
According to the agency, it costs around Rs 8,500 per sq ft of the saleable area (including land cost) to construct flat in Mumbai Metropolitan Region (MMR) while the average price is Rs 10,640 per sq ft of the saleable area.
The Rs 750 per sq ft reduction in costs will be around 8.8% of the cost of flat construction in MMR while Rs 150 per sq ft could be 3.2% of the cost of construction of flats in Pune. Premiums in MMR tend to be of the order of Rs 1,500 per sq ft (Rs 1,000-2,000 per sq ft) while the same typically stand at Rs 300 per sq ft in the rest of Maharashtra.
As of now, buyers have to pay 3% of the flat’s price as stamp duty in Mumbai. This is scheduled to rise to 5% beyond 31 March 2021. The builders can avail the above-mentioned cut in the premiums only if they agree to pay the stamp duty on behalf of the buyers.
Effect on new launches in MMR
Ind-Ra opines buyers will likely sense that the around 7% reduction in all-in prices is a one-off event, which is available only up to 31 December 2021. Therefore, those buyers who are bullish on the long-term real estate price outlook and have a stable source of income may choose to bring forward their housing demand. This may significantly boost the demand for housing in 2021. However, it is difficult to ascertain the exact quantum of increase.
The analysis assumes that builders have an EBITDA mark-up of 25% in MMR and competitive pressure will force them to pass on the cost cuts to buyers. The analysis ignores 1% registration charge that the buyers have to pay.
Effect on new launches in rest of Maharashtra
The all-in prices in the rest of the state are likely to decline by about 2.8%, as a result of the reduction and the impact on demand is likely to be correspondingly lower.
Impact on already launched projects
The impact on the already launched projects is somewhat less clear as at least a part of the premium would have been already paid and there is no proposal to refund the premiums already paid. However, even existing projects are likely to benefit from the premiums to be paid and may be able to see a commensurate reduction in prices and a resulting increase in demand. In case, builders fail to cut prices on the already launched projects, they may face increased competition in some cases from potential new launches in the vicinity.