Good news for HOME / FLAT BUYERS in Delhi Area

[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.

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 @ ₹ 10000/- per s.ft. land share is about ₹ 7000/- per sq. ft and construction and facility costs will be 2000 per sq. ft and ₹ 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.