Clarity on the benefits of Carpet area pricing

The UnReal Pricing of Real Estate

Clarity on the benefits of Carpet area pricing

If we trace the evolution of the property market taking Mumbai as a case study it becomes very clear how and why the lack of transparency gradually crept into property dealings.

Historically property has been measured or traded in terms of the carpet area available to the buyer. Earlier, that is upto the mid 70’s, property was being traded in Mumbai purely on Carpet area. The Carpet area here being equal to the size of the carpet spread required if every inch of the inside of the house was to be covered.

This was clear and measurable. You could literally take a measuring tape and with a help of one person, measure and calculate the actual carpet area of any given apartment or shop.

Now one notable point here is that during this period the kind of properties being developed were largely ‘Plain Vanilla’ stand alone buildings with Ground plus three, four or even seven stories. Hence what the developer paid for in construction (i.e. the Construction Area) was more or less equivalent to the carpet area he got for sale. The difference was about 10-12% which was basically the area with the walls (or the Built-up Area)

Over the next decade and half the design and elevations of buildings changed drastically. Buildings evolved from simple ground plus configurations to stilts then basements and then podiums etc. Today you even have buildings with 7-10 podiums.

Over a period of time, the concept of developing complexes with a Club, swimming pool and other such amenities started to gain ground.

This resulted in the increase in the amount payable by the Developer to the contractor which was on the Construction area. Somewhere along the line, one day while doing a simple calculation, the developer realized that he was spending for more area than he was being compensated for. Now this was unfair by any standards to him so he took the additional area and divided it equally among the total area which was fair.

There was a certain amount of initial resistance by the buyers but then there were very limited options, so buyers went with the flow.

Also what is important to note is that during the mid 70’s the competition among developers in the market was not so high. Hence whatever quality of design or simple elevation they offered was acceptable to the buyers.

In later decades, as this competition grew, ‘the mine is bigger and better than yours’ syndrome (obviously market/demand led) drove the developers to provide a number of add-ons.

The concept of Built up / Super built up basically started as a result of this justification for the cost being incurred on these add-ons.

This is fair as long as one can measure and calculate and then justify the actual area being calculated for by dividing the same among the various flats.

Over a period of time however, this actual calculation gave way to a notional percentage commonly known as the “Loading” factor. This notional percentage also has undergone its share of Darwinian evolution. Starting from the actual built up area i.e. 11% – 15% over the carpet area, to 40% – 50% now and in some cases it has reached even upto 60% over the carpet area.

Why has this happened?

In a competitive market like today where both the land prices have touched the sky as well as demand has gone even higher, in a bid to remain competitive (and of course save his profit margin) in the market in terms of a “Per Square Foot Rate” (psf) the developer started using this tool of “Loading” to manipulate the area factor in the equation (psf x Area = Total Value) of the total value of the flat, in a way which nobody would decipher easily.

The total value may not vary, however the per sq.ft. price reduces dramatically (with a loading as high as 50%) giving a pseudo impression of “Bigger Flat at Lesser Price”

This discretion started with a justification of the calculation of the actual loading but has now evolved to arbitrary notional loading of upto 50%. This percentage also is not standard and depends on the scale of the project, location, amenities, reputation of the developer and many more factors, cost of land, profit expected etc etc.

Therefore, if you are given a quote for a 1,000-sq-ft super built up area apartment the actual carpet area may just work out to be around 666.66 sq ft. and the area mentioned in the agreement would be anywhere between 750 sq.ft to 800 sq.ft. Thus you have now three different areas and none are measurable.

If this area referred to, is the carpet area, then you have a living space which will actually measure up to 1000sq.ft. (This measurement can be done by an engineer or architect you appoint).

If it is built-up area, you have lesser space and in case of a super built-up area, you compromise heavily on the living space. In fact, the area goes up and the price per sq.ft goes down, giving the buyer a pseudo comfort on the price; however the effective total cost remains the same.

Carpet area pricing will therefore bring in transparency in real estate and pave the way for the introduction of best practices in line with international norms and standards of dealing.

How does it affect the customers?

The basic notion is that the higher the amenities provided by the builder the higher is the loading. However in the current scenario the loading is a factor of not just the Amenities being provided but also the image and equity which the Developer’s Brand commands; the location of the project, the competitive scenario of other projects in close proximity and the land price and scale of the project.

This is the reason why loading varies even among projects even within a particular location.

What would happen if all developers have Carpet area Rates

Will the amenities go down?

CERTAINLY NOT as they are a result of the huge competition that is there in the market and are value additions to enhance the perceived value of the project

Will the price go up?

It will REMAIN CONSTANT or maybe price will reduce a bit in some cases (depending upon the projects and the fundamental valuation)

However if one looks only at the per square foot rate, well it might look higher but the Total Value of a unit will remain more or less the same.

The Way Forward

There have been recent announcements by the Maharashtra government that they are working on issuing a notification on this matter in the state; however no concrete announcement has been made yet.

Looking to the current scenario wherein a lot of global and corporate players are entering the Real Estate industry, it is not a distant dream to expect that the entire industry (or atleast a few key & important leaders) will shift to a paradigm of real value and real time pricing in Real Estate.

Jayant Gehi

Mayfair Housing Ltd