CA Dev Kumar Kothari
Today on 26.11.14 in news channels it has been reported that more construction will be allowed
in Delhi area as floor area ratio has been considerably increased for various
types of plots.
This is very good news for home/ flat buyers because cost of proportionate share in land will reduce
substantially. Builders must pass
on this benefit to buyers.
on this benefit to buyers.
In a medium to high value flat about 60- 70% cost is for share in land and balance 30 -40 % is for
construction and facilities and profit of builder. For example, in a high end
flat selling @ Rs.10000/- per s.ft. land share is about Rs.7000/- per sq. ft
and construction and facility costs will be 2000 per sq. ft and Rs.1000
will be normal profit of promoter.
If double construction
is allowed then cost of share in land should come down to 3500 per sq. ft. As
more area is constructed, overall cost of construction, facilities and overhead
expenses of builders will fall considerably.
Stand alone houses will also benefit:
Even in case of standalone houses on small plots of land more
area will be allowed so costs of flats will come down. A retired person will be
able to put on more area on his plot so that he can sell some flats/ floors and
retain as per his requirements. Or he can let out surplus construction on rent to needy
persons who can become his tenants.
Wait and watch is advisable:
Buyers of flats/ homes
can adopt wait and watch for some time to see price of flats to come down.
Due to more area being
allowed, it will also be possible to purchase flats in better location, where
price of flats can fall considerably due to ratio of cost of share in
land being very high in total cost.
Reaction in share market:
The news of more area
to be allowed was taken very positively by share
market market. Price of many realtor companies jumped more than 10%.
The news may not be good for builders:
In opinion of author
the news may not be good for builders. Firstly because many intending buyers
will prefer to wait and watch to see fall in prices, many who have booked flats
will try to renegotiate price hence defer payments.
The value of plots to be acquired by builders will increase as owner will
demand higher price.
Value of unsold stock will fall:
since there is lot of unsold stock of built up area, availability of more area for construction due to increased
Floor ratio allowed, is likely to increase supply and therefore
rates of flats/ offices must come down and there can be substantial loss even
on existing stock of builders.
The stocks may become
slow moving for time being.
Banks and housing finance companies will gain:
Banks and housing
finance companies will gain because at lower price demand of homes will
increase so the demand for home loans will increase. At lower price, homes
being more affordable, there will be less defaults.
Construction material manufacturers will gain:
As discussed above,
more area will be allowed to be constructed on same plot of land, so the demand
for construction material will increase. Companies in such business will gain
considerably.
Authorities must ensure that benefit is passed
on to home buyers:
The purpose of relaxation of floor area ratio is to reduce costs
of houses. Competition Commission and other authorities must do their duty
diligently to ensure that benefit allowed is not solely enjoyed by builders and
to look
after interest of home
buyers.
Similar steps are desirable in other areas
also:
In other area also
similar steps are required to allow more construction on same plot of land.
This will help in making housing affordable.
Safety measures should be looked into:
With more area being constructed on same plot, some additional requirements for safety
and security may be
required in relation to construction of building and facilities to be provided in such enlarged
buildings. Authorities must take full care to ensure the same.
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