No segment is as disappointed with the fate of Mumbai real estate as apartment owners of buildings scouting for redevelopment. In the exuberant days of 2006-11, developers were jumping over each other to gain favour among residents of buildings that had potential to get redeveloped. The older the building, the better.
Promise of a new dawn
Owners of apartments in creaky and shabby buildings saw the notional value of their houses multiply. The premise was simple: the owner of an apartment in a worn-out building would get a bigger apartment in a new and flashy building - free. If luck had another name in Mumbai, it was redevelopment.
In its simplest definition redevelopment involves the demolition of an old & small building and replacing it with a bigger building – subject to municipal authority norms. The equation is straight-forward: Residents of the old building get apartments in the newer building, 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.
Until 2011, norms mattered little while the nexus mattered a lot. The widespread manipulation, along with a hot property market, permitted developers to make super-normal profits. Builders went in a bidding war to give the best deal to redevelopment prospects. It was routine to hear of proposals wherein owners were offered 100 percent extra space in the new building, lucrative transit rents and a giant corpus.
In 2011, the Brihanmumbai Municipal Corporation (BMC), the municipal body that runs the city, would get its most impactful regime in at least two decades under the municipal commissioner Subodh Kumar. In a short tenure, the brazen leakages would be closed and the real estate industry moved to a level-playing field.
Oh! What a wasted opportunity
Eight years later, it will be fair to say that the real estate story in Mumbai has been a major disappointment. Given the paucity of open land, real estate in the commercial capital is predominantly a redevelopment theme. And, things are not looking good.
Redevelopment proposals in the last year have come down by 50 percent. It is certain that 2020 and 2021 will see even a further decline. It is easy to blame the real estate industry for this quagmire, but that would be wrong. Profitability levels are at an all-time low while regulatory accountability is at an all-time high.
A large part of the blame goes towards the notorious level of levies and premiums charged by government authorities. In the current crisis, there may be waivers and deferred payments dangled for a limited period but it is unlikely to be sustained. From 2022, the journey towards bankruptcy of the BMC is likely to begin as the central government stops compensation in lieu of octroi.
With this is mind the only way to get redevelopment kick-started is by reducing the land cost for a project. In redevelopment – the land cost is the expense borne in construction of the free flat for the old owner, the transit rent paid to the owner when redevelopment is being done, the corpus that acts as a security etc.
These are negotiated between the developer and the residents. It is tough to arrive at a fixed number given the number of variables involved - but it is not uncommon to have land cost be at 25-30 percent of the project cost.
Even within that not all plots of land are equal. A freehold plot is preferred in comparison to a plot owned by the BMC (estate) that is leased to a landlord. Naikaj Bhobe of PN Bhobe & Associates says “70-75 percent of plots in premium locations of central suburbs are estate owned which has a higher cost structure. In an environment of falling prices, projects on these plots are unviable or done at wafer-thin margins. Hence developers avoid redevelopment in estate plots.”
That means owners of apartments looking for redevelopment will need to lower their expectations. And it must be said – most of the redevelopment potential in the last decade has been frittered away due to internal factors. Lack of unity within members, rampant corruption in selection of the developer, last-minute demands and greed have hurt enthusiasm among credible players for undertaking such projects. The developers that often agree to the terms make unrealistic expectations on demand from the end-buyers. Given the number of projects that never take off or get stalled mid-way, one thing is clear in redevelopment proposals: The highest bid is rarely the best bid.
Eventually redevelopment is sustainable only when stakeholders lower their expectations to an extent wherein the end-customer finds value and affordability in purchasing an apartment in the new building.
Will this happen soon? It is only a matter of time. If there is one lesson that the collapse of old and vulnerable buildings every year illustrates – it is that the stakeholders should not leave it too late. The era of the jackpot in real estate is over. Every other stakeholder in the chain has recognized it. It’s time the owners do it too.
(When not busy with his newstoon platform Snapnews, Vishal Bhargava is a real estate enthusiast who views and reviews new projects. The views are personal.)
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