Real Estate - New DCR regulations: A level playing field; Edelweiss,

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The Maharashtra government has introduced the amended Development Control Regulations (DCR) for Mumbai city/suburbs. The new regulation creates a level playing field for developers and does away with discretionary exceptions which had led to FSI-free areas accounting for a significantly large chunk of saleable area. We view this as a significant positive since it will spur new launches in Mumbai which have been on hold for over a year. Accordingly, we expect prices to correct and volumes to recover. While we are yet to see the fine print, initial estimates indicate NAV dilution of ~4-7%. However, resumption of the currently-grounded business cycle will be a positive for Mumbai developers’ cash flows and stock performance.

Amended DCR largely along expected lines

The amended DCR is largely along expected lines with areas of balcony, flower beds, terraces, voids, niches etc., being counted in the FSI. Further, compensatory fungible FSI will be available to the extent of 35% for residential and 20% for industrial/commercial developments. Accordingly, we believe developers in Mumbai will now be able to construct on the basis of 2.7x FSI against 2.0x FSI, while we do not expect material changes in saleable area for an above-the-board project as areas free of FSI will now be disallowed.

Additional FSI comes at a price

The additional FSI will be allowed at 60%, 80% and 100% of the ready reckoner rates (of applicable land rates) for residential, industrial and commercial projects, respectively. Thus, while there is unlikely to be additional benefit to developers from increase in saleable area, there is likely to be additional outflow of ~5-10% of project realization towards payment of FSI premium, impacting NAVs by ~4-7%.

Transparency, clarity and a level playing field are the dividends

Ceteris paribus, we expect these measures will curb discretionary powers and usher in greater transparency in land bids. Additionally, the long awaited DCR amendments with curtailed discretionary powers are likely to result in greater clarity and transparency in the approval process, which will be a significant long-term positive.

Outlook: Resumption of launches and price correction in the offing

Since November 2010, approvals in Mumbai had slowed down significantly. Subsequently newer launches were deferred, curtailing supply, leading to higher prices and reduced volumes. Going forward, we expect new launches to follow by Q1FY13, resulting in easing of property prices and improvement in volumes. While we are yet to see the fine print, initial estimates indicate NAV dilution of ~4-7%.

Top Picks: Oberoi Realty and Phoenix Mills.