FSI increase in suburban Mumbai

In a major policy move, the Maharashtra government has allowed an increase in Floor Space Index (FSI) from 1 to 3x in suburban township projects. Under this policy, if developers construct affordable housing stock of 0.75x FSI and hand it over to the government, they can avail of higher FSI on their plots. The move is aimed at improving the affordability of suburban residential development and the low cost housing stock with the government. The policy, in our view, is a major positive for suburban township developers in Mumbai like IBREL/ HDIL that have large land parcels for township development in the suburbs.

IBREL (+20msf) / HDIL (50msf) and Godrej (4 msf) have large suburban township projects in Panvel and Virar regions and hence stand to benefit in the longer term from this policy. The additional FSI comes in lieu of additional construction done for providing housing stock to the government and as such is not free. Nonetheless, it still is accretive for value on a marginal cost basis. FSI increase additionally should keep longer term price inflation in check in these areas allowing for more sustainable demand.

As with other major cities in India, Mumbai’s population growth is now concentrated in the suburbs. As per the last census (2011), population growth over a 10-year period in suburbs like Navi Mumbai (+56%), Virar (221%), Panvel (113%), and Thane (44%) have outgrown the city center (-5%) or main city (only 5%) growth.

FSI levels (1-2x) in most Indian cities are way below most global city standards despite each individual city (NCR/ Mumbai 20MM+) having populations to rival small countries. FSI increase, in our view, is the only possible way to reduce pressure on land & infrastructure rollout costs. Some cities have at the margin started to increase such levels (i.e., Noida, and now Mumbai) but this still is yet to become a more generalized trend across major cities.

REIT Regulations in India for Dummies

SEBI has approved the SEBI (Real Estate Investments Trusts) Regulations. In its Finance Bill 2014,
the Government cleared a majority of tax regulations for the eventual listing of the REITs in India.
SEBI is yet to release a detailed notification, which is expected in the next two months. Most
regulations from the proposed draft (REIT regulations 2013) were passed, with a few relaxations.

• 80% should be invested in rent yielding projects versus 90% mentioned in the drafts
• Value of the REIT for an IPO has been reduced to Rs 5 bn from Rs 10 bn.
• Multiple sponsors are permitted with a maximum of three.
• Borrowings shall not exceed 49% of the value of the REIT assets, versus 50% in the draft
• Minimum size of the IPO shall be 25% of post issue share capital or `2.5 bn whichever is higher,
  versus Rs 2.5 bn in the draft
• REIT shall have at least two assets with a maximum 60% investment in one asset; versus REIT can invest 100% in one asset.

We await clarity from detailed notifications over the next one-two months. The Finance Act 2014
has already specified tax related incentives proposed by the Government. We wait further/changes
if any in the tax structure for the eventual listing of REIT instruments.