A new scheme promises to make Mumbai landowners wealthy or ruin them

Mumbai, India.

A battle to secure the rights to redevelop property in the upmarket Bandra area, where among other people Shah Rukh Khan lives, threw up some startling bids. The lowest bidder offered an additional area of 37 percent in the redeveloped project to all existing apartment owners. This means an owner with a 1,000 sq ft home in the old building would get an apartment of 1,370 sq ft in the newly constructed building. The highest bidder, however, offered an additional area of a whopping 116 percent to all apartment owners. The 1,000 sq ft apartment owner would now get a 2,160 sq ft home.

This begs the question: How are developers offering such different terms? Simple: They are bidding under two different schemes. And one of those is a new scheme that has the potential to make apartment owners in posher locations very wealthy or ruin them. It’s the Development Control Regulation 33(11) of the Slum Rehabilitation Authority (SRA) scheme.

Simply put, it allows the builder to construct more area (higher FSI) than a normal scheme would, at a much lower fee to be paid to the government. At the top end of the road-width criterion, a developer can construct almost 70 percent more area than under a normal scheme. This gives a developer room to offer lucrative deals to landowners/apartment owners in a society.

In return, the developer has to offer a certain number of free homes to the government. These homes are called Permanent Transit Camps or PTCs. The builder has the liberty to provide these free homes 1) anywhere within 5 km of the project he is constructing 2) in the adjoining ward 3) western suburb to western suburb/eastern suburb to eastern suburb/city to city.

Example: The project can be in Bandstand, Bandra, overlooking the sea, but the PTCs can be constructed in Dahisar at the northern tip of the city, unlike in a typical SRA project where the rehabilitation building and sale building stand next to each other.

It's a very liberal scheme that I am certain would have even surprised many builders. In theory, it seems like a win-win plan. Existing apartment owners get wealthier, developers make more money through more construction, homebuyers get a wider set of options and the government gets free homes along with money. Unfortunately, the only theory in Mumbai real estate that really holds up in practice is that the government makes more money.

That’s because excessive FSI is no guarantee for profitability. For starters, it makes builders excited and that often means irrational thinking and underwriting to acquire new projects. This eventually results in a higher sale price for a homebuyer, resulting in the potential for slow sales and possibly slower project execution.

Secondly, oversupply of homes can create pressure on prices even as the cost of construction rises with buildings going taller. Thirdly, many prime locations in Mumbai have a height limit due to the presence of an airport. The vertical limit constraint means developers have to go down (basements), leading to time and cost overruns.

These are a few of the challenges, but they pale in front of the biggest one, the regulatory one. Regulations demand the delivery of free homes or PTCs to the SRA. A builder will have to either construct these PTCs himself or buy it from someone. Given the unavailability of land for this construction as well as associated challenges, a vast majority of developers will not construct these PTCs. They will need to depend on another player and purchase these PTCs. That means a partnership in an emerging ecosystem where there are negligible organised players. Having a partner in a Mumbai real estate project is anyway dangerous but having a partner in a Mumbai SRA scheme project can be fatal. If the supply of PTCs stalls, the building on sale stalls.

After scanning multiple proposals, I am surprised at the number of developers who are embarking on this scheme without substantial protection on the PTCs. But I am even more surprised at the number of societies that are entertaining these proposals. When proposals are too good to be true, they probably aren’t.

Jitubhai Patel of Aakar Architects, a key consulting firm, tells me that “the era of mischievous SRA developers is over. The old ways of working no longer prevail. The market has matured in the last decade.”

I hope he is right. But for the current scenario and evolution of this scheme, the best option is 1) The same heavyweight developer constructs PTCs in a plot that is also controlled by them 2) Purchase PTCs that are already constructed. I am certain credible players in the supply of PTCs will emerge over a period of time. But I am equally certain that multiple scandals will emerge prior to that.

Until then, societies that are embarking on this scheme need to balance their greed with due diligence. It may not save the day for all, but it will ensure that complete ruin will occur only after multiple safeguards are breached. For home buyers - be cautious in buying apartments at the early stage of these projects.