Unlimited FSI In Hyd An Extreme Step

According to a 2021 study by Jedwab, Barr and Bruckener, if the building height regulations were less stringent, total building height in India would have been an additional 17 km per urban capita. FSI regulation is, perhaps, the most effective means of controlling building height. FSI stands for Floor Space Index (also known as Floor Area Ratio: FAR). FSI is the ratio of the total floor area (of all floors) of a building over the area of the plot, on which the building is situated.

The typical FSI in urban India would be somewhere between 2 and 3. In urban Mumbai, FSI varies between 2.5 and 5. Cities like Bengaluru are faced with acute congestion problems with a much modest FSI. At the extreme is Hyderabad. In some parts of the city, the FSI could be in a rather extreme range of 6 and 7.5. In 2006, the Andhra Pradesh Government introduced Order 86, effectively eliminating the FSI policy for real estate constructions, thereby encouraging the proliferation of high-rise buildings in Hyderabad. The government scrapped FSI restrictions to attract real estate investments to Hyderabad.

Tall buildings provide a visual amenity that fetches premium rents and prices. Studies by Jason Barr (Rutgers University) and colleagues present evidence that as urban land tends to be in short, inelastic supply, rents in tall buildings increase faster than inflation. Some studies caution against excessive regulation on tall buildings.

In my study titled ‘Revisiting the hotel capitalization rate,’ I found that cities with higher regulation constrain the supply, leading to overpricing. Some experts argue that tall buildings have the potential to mitigate the need for more land to build more, thus keeping prices low. Moreover, if the city does not expand vertically, it will spread horizontally leading to urban sprawl which is detrimental to the environment. So, are skyscrapers the silver bullet to address environmental and affordability issues?

Not really. In lack of FSI regulation, cities are at a risk of oversupply. Tall buildings create negative externalities too. The shadows that they create diminish valuation in neighboring properties and compromise the quality of nearby open spaces. Critics argue that tall buildings lead to environmental problems, congestion, and more importantly, gentrification. China has recently been discouraging the development of skyscrapers for a few reasons: Many developers failed to ensure quality. Many copy-cat (of developed nations) buildings were considered ‘out of context’ that ignored surrounding areas and local histories.

Our study titled ‘Pricing Extreme Attributes in Commercial Real Estate: the Case of Hotel Transactions’ provides a more nuanced view: Tall buildings that stand out benefit only premium segments in terms of valuation. In lower price segments, they could diminish value. However, we also found something interesting: Having the ‘tallest’ hotel in the vicinity has negative externality in premium segment hotels. We term it as ‘snobbery effect’ as investors discount the value of premium assets dwarfed by another tall tower.

However, lower price segment hotels derive a positive externality from the tallest assets nearby as a brand spillover. The marginal cost of building increases with building height, as engineering and functional complexities increase. Economically driven developers look for an optimal height. Others are driven by ego. At least, so say the critics of skyscrapers.

Post-Covid, there has been a notable shift towards more spacious homes in Hyderabad, favoring low-rise, suburban developments. This has redirected much of the demand away from high-rise properties, as noted by an architect (Money Control, Sept 20, 2023). As a result, there has been a steady decline in the share of skyscraper launches in the city since 2019. Despite the 2006 regulations, certain restrictions remained intact. Notably, the rules stipulated that the minimum plot size for any high-rise structure must be no less than 2,000 square meters. Additionally, constructions near major roads exceeding 30 meters in width were subject to approval only upon provision of black-topped service roads with two lanes and a minimum width of 7 meters.

Clearly, it is a balancing act. On one hand, high FSI could help absorb the outstanding urbanization of Telangana and curb the urban sprawl. On the other hand, there are environmental and social issues that need to be addressed adequately. The city administration must empirically assess the social, economic, and environmental impact, and decide how long to keep the FSI unrestricted.

(The author is the Chairperson (Finance & Accounting Area) & Associate Professor (Real Estate Finance) at IIM-Ahmedabad)