In the last few months there has been a flurry of activity in the redevelopment market of Mumbai. Numerous building societies have made more progress in the last year than they probably have made in the last decade.
First, what is redevelopment? Put simply, redevelopment involves the demolition of an old and small building and replacing it with a new and bigger building – subject to various norms. The equation is straight-forward: Residents of the old building get larger apartments in the newer building for free, a certain number of apartments in the new building are sold in the open market by the developer for his profit, and the government earns revenues by selling FSI to the builder.
On October 4, 2020, I wrote a column titled “Mumbai’s real estate revival depends on lesser greed – not from the developer”. It was an unusual title because the reputation of builders is so notorious that blaming anyone else for the malaise in the real estate sector is akin to blasphemy. Of course there are views from limited corners that highlight the role of the government in squeezing the real estate sector. But there is absolutely no one willing to point out something unpopular - that a big contributor to the sluggish state of Mumbai real estate are homeowners of societies looking to get their buildings redeveloped. Their demands have been out of touch with reality.
The demands may have been reasonable more than a decade ago, during the booming and scandal-driven era of Mumbai real estate. In that phase of rising prices, developers were manipulating norms in such a brazen manner that it would make Nirav Modi smile. This provided builders with a buffer to provide a giant corpus to every member of a society, generous transit rents as well as substantial additional space in the new free apartment. In short – it was a jackpot offer. Some were very lucky. Unfortunately, many were not – as many homeowners, after vacating their homes, never saw a new building come up as projects got stalled. But it set a benchmark on expectations that refused to go away. That meant land costs for a project remained at elevated levels stretching developers financially and impacting demand for housing as end-buyers struggled to climb the affordability ladder.
It didn’t decline meaningfully even after the municipal authority clamped down on mischievous practices of developers that would reduce their ability to offer generous terms. It didn’t decline even after home prices started their decline. Neither did GST or demonetization result in any tangible lowering of expectations.
Now – it finally has. The outbreak of COVID-19 was the trigger and the second-wave has only accelerated it. Home owners and societies have read the writing on the wall. Agreements have been finalized with remarkable alacrity – at realistic terms. Today it is not uncommon to see builders offer incentives that are half the levels of what existed five to eight years ago. More housing societies are being responsible in their choice of developer rather than foolishly opting for builders that sell imaginary offers. Society committees that often held a veto on redevelopment or on the selection of a particular developer are seeing growing resistance from otherwise passive owners in a building. Corruption still persists, with the spoils given disproportionately to a select set of owners – but that is unlikely to end anytime soon. Developers with a track record are seeing more preference and being chased by societies for execution.
Personally, I am relieved to see this acceptance of reality. It should have happened much earlier, given the manner in which the landscape of Mumbai real estate has been altered. Is this the new benchmark? In my view – not yet. Firstly, the majority of deals that have materialized (or are materializing) in recent months have been inked by those who stopped viewing redevelopment as a jackpot. Instead, they viewed the pandemic as an event to decisively act on getting a new and larger apartment to settle in. Secondly, even today the choice of developer is abysmally poor by many societies. I assume these are primarily cases of shady corruption - because the alternative is tremendously poor judgement. Remember the highest bid is rarely the best bid when it comes to redevelopment.
Developers are not celebrating. Despite the lowered demands, the cost-structure and market conditions are not yet viable for many to undertake new projects. That will need support from other stakeholders – including the government. The FSI premium cut by the government has turned out to be a disappointment.
Nevertheless COVID-19 has brought one key stakeholder, land owners, to re-imagine their view of redevelopment. That must be welcomed.
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