Shishir Asthana
With nearly 5,800 redevelopment projects stuck at various stages in Mumbai, flat owners are a worried lot. Should they continue to stay in the dilapidated buildings, sell their flats or risk everything and go in for redevelopment?
Taking cognisance of the deteriorating state of old buildings in Mumbai and the limited options in front of the old flat owners, the Maharashtra government has opened a new window – “self–development” which allows the existing flat owners to reconstruct their building. In order to finance the same, the government has allowed a co-operative bank to finance up to 95 percent of the cost.
In a sector that has newly opened up, there are many questions than answers. In a bid to clear the cloud around self-development, Moneycontrol spoke to Toughcons Nirman Pvt. Ltd. a group of professionals headed by Nayan Dedhia and Jayant Gaitonde, who undertake turnkey self-development projects to understand the nuances involved in self-development.
Q: For a 30-40-year-old society that is not in the best of conditions, what are the options to make it safe and liveable?
A: For a building that is old, dilapidated and dangerous to live in, there are the only two options – either to go for major repairs or to go for redevelopment. On redevelopment, there are two options; one is to go for the builder or to go for self–redevelopment.
Q: What is the status of redevelopment through the builder route in Mumbai?
A: There are nearly 5,800 projects that are stalled in Mumbai either because the builder has no funds or because permissions are pending or because the builder has no intention. Looking at this grave situation, the state government decided to allow buildings to go in for self-redevelopment. For funding of these projects, Mumbai District Central Co-operative Bank Ltd. has come up with its self-redevelopment finance scheme.
Q: From a society member’s point of view, what is the difference between going with the builder route and going the self-development route?
A: When a society decides to go with a developer, it agrees to share the profits of redevelopment with the builder.
On its part, the builder is just like a sourcing agent. He merely subcontracts all the work and takes the calculated risks. He appoints professionals externally and outsources contractors as well as the marketing & sales team. In almost all cases, the builder doesn’t put in own funds but rather borrows from banks or NBFC’s (non-banking finance companies). Given the sorry state of redevelopment projects, banks have stopped giving funds to the developer. The only option left with them is either to borrow from NBFCs at a high rate or to use private finance at a much costlier rate.
In the case of self-redevelopment, the society plays the role of a builder to a large extent. It can take the services of a development manager to professionally manage the project. The society has more control over the project and can drive the project. Since society members are keen to move into their own flats as soon as possible, their motivation for completing the project is higher than that of a developer.
Q: What about the funding part? How will the society get the funds?
A: Presently, MDCC Bank finance up to 95 percent of the project cost, which includes the rent to the members who have to stay in alternate homes while the project is being constructed. The members will have to arrange only 5 percent of the project cost.
In such a case, the society has to mortgage their land to NBFC. As soon as the Mumbai Bank enters on IOD, it reimburses the 5 percent or the costs incurred till IOD, and the mortgage charges are transferred to Mumbai Bank.
In our experience, this amount generally comes from members who would like to book an extra flat or an extra additional area in the reconstructed building. Their pre-booking normally takes care of the 5 percent that is needed from members. In case members are unable to raise this fund, we can also get it arranged from NBFCs or private fund houses.
It is only after the members manage to raise the initial amount and procure approvals (IOD), Mumbai Bank will finance the project. In other words, the members would have secured the project with all permissions and funds in hand even before vacating their flats.
A member can buy either in the pre-sale and sell it after the commencement certificate is obtained or during the construction phase or after the OC is obtained.
Chances of inflation in cost affecting cost overrun are almost nil as all approval costs are paid before members vacate their premises. The contractor is appointed before the start of the construction. We take utmost care in finalising the contractor quotation where all inflations are considered while preparing BOQ (Bills of Quantities).
As per the BOQ, the contractor has to take the Contractor All Risk Policy which covers all the unforeseen incidents along with labour risk policy. As per RERA, all projects have to get the title insurance also. Hence, insurance is important and covers all the risk related to the project.
Q: Let’s talk numbers. Say a society which has flats of an average size of 500 square feet – how will the two options of redevelopment work out for them?
A: In terms of cost, there is a lot of hidden profit and cost that a developer includes in the estimates that he submits to the society. For example, there is a development agreement, and the developer incurs costs around 1 to 2 percent of the total project cost. This would be the first big saving since a society with 100 flats of 500 square feet will have a project cost of Rs 150-200 crores, and 2 percent of that would be Rs 3-4 crores. When the society goes for self-redevelopment and appoints a development manager, there is only a work order of appointment and no development agreement. Hence, the stamp duty applicable on the development agreement is saved.
Further, whenever a developer bids for a project, he bids with a lot of margin of safety both in terms of time and money. Take the case of rent. If the project is expected to be completed in 24 months, he would take 30 months in his costing. Likewise, there are other hidden costs that are used by the developer to inflate the project cost.
Similarly, the developer is generally not transparent in the additional area that the project gets. He would be willing to share only a part of the information and would corner a bigger portion of the benefits for himself.
One big factor that needs to be considered is the cost of funding the project. These days in Mumbai, there are nearly 5,800 incomplete redevelopment projects which are stalled, and banks are unwilling to finance them. Even if banks do so, it is at a very high cost. Most of the funding is through NBFCs or private financiers who charge upward of 18 percent.
However, for self-development, the project is financed by Mumbai Bank at 12.50 percent. This is a clear minimum of 5-6 percent saving on the project. Given the size of the society, this is a big saving.
Q: Can you compare the benefits that a society member will get in both the case?
A: In the case of the builder, the society will generally get around 25 percent of the incremental carpet area and a corpus fund (profit) of Rs 1,000 per square-feet that the builder will give to the members.
In self-redevelopment, the same member will get around 1.5 times more than what the builder is offering, which, in this case, will be around 38 percent.
Furthermore, since the entire profit will accrue to the society members in self-redevelopment, it will be around Rs 6,000 per square-feet on a conservative basis against the developer offering Rs 1,000 per square-feet.
So, in self-redevelopment, the members will get 1.5 times the incremental area and a conservative six times higher corpus fund (profit or surplus fund) to the society, which will be distributed to the members according to their area after clearing the loan from the bank and the total project cost.
Q: What about delays? Can self-development projects be stuck in the same way as in redevelopment by builders?
A: There are generally two reasons for the delay – funds and approvals. In the case of self-development, members will be vacating their flats only after all the approvals are in place. As for funds, the question does not arise as the bank will only disburse when 5 percent of the fund is made available by the members. Thus, the entire money will be at the society’s disposal before the project has even started. The money payable to the contractor is paid only by the bank or from sales proceedings and that too when he raises a bill after completing a part of the project – say raising a slab.
One of the reasons why nearly 5,800 projects are stalled is there is little recourse available with the society if the developer is not performing. Policy guidelines were issued for the selection of a developer under the section 79A of MCS Act 1960. However, there were no guidelines for terminating the developer. The only way the developer could be terminated was by going to the court.
These days, the honourable High Court is clearing cases in a span of six months. But, even after the High Court judgment, the builder will go in for arbitration which is a costlier affair and may take years. Here, too, the builder may ask for any amount that comes to his mind. Members, who are out of their homes and paying their own rents, may be compelled to pay him to rescue their homes.
In the case of self-redevelopment of society, there is no developer, so this issue does not arise. There is no development agreement with the contractor who will be erecting the building. If the society is dissatisfied with the contractor’s work, they can be changed overnight after settling their dues, if any.
We feel that only if a society has the money and the stamina to chase the builder then only it should go in for the builder route for redevelopment.
Q: What about the mortgage that Mumbai Bank will hold for disbursing 95 percent of the project cost?
A: None of the members flat will be mortgaged. Only will the society’s plot, like a garden or the parking area, and saleable flats be mortgaged. But, flats owned by individual members will not be mortgaged. The rights of the members will not be mortgaged.
After the project is completed and the bank loan is still outstanding, the mortgage from the plot is released, and lien charge remain on the saleable flats only. If the society repays the loan through its speedy sale of flats, it can release the mortgage and the lien on the selling of flats.
Q: Do societies have an option of looking at any other banks apart from Mumbai Bank?
A: Presently, only Mumbai Bank - being a co-operative bank - is authorised to lend for self-redevelopment. Banks give loans to individuals and businesses because of its income stream. A housing society does not earn any money. Hence, banks are not willing to give it the loan. Today, even if a society needs to undertake some urgent repairs, the only route open to it for a loan is co-operative banks. It cannot approach any other bank.
As for Mumbai Bank, in a matter of a few months, the bank has cleared 32 projects, and the construction has started in seven societies. Mumbai Bank is considering nearly over 800 projects as we speak. Soon, it will be made the nodal agency for a consortium of another co-operative bank which collectively will have a lending book of Rs 25,000 crore for self-development.
The other reason why other banks have not yet come in is that the DCR (Development Control Regulations) 2034 is not yet in place. DCR 1991 cleared the route for slum redevelopment and DCR 2034 will be remembered for the policy document for self-redevelopment. We, in Toughcons, have been involved in recommending on the policy document which is in the final stages.
DCR 2034 will allow societies to go for self-redevelopment. A single-window clearance for all approvals will be cleared in a matter of six months. It will also clearly state the rules for buying TDR (Transferable Development Rights), additional area benefits, taxes as well as lay out the condition that the project should be completed within three years.
Q: Where, in your experience, do you see the problem in self-redevelopment?
A: The biggest issue that we have seen is a lack of self-confidence among society members. They feel that only an experienced builder is capable of taking a project, and they, as members, do not have the wherewithal to do it. This lack of self-confidence is the biggest reason why members are hesitant.
Secondly, the concept of investing beforehand – even for the 5 percent needed to develop their building – is not acceptable to many members. They compare it as a cost which they have to incur while the builder who is undertaking redevelopment never asks for upfront money. This mental block of thinking as a member, and not as a developer, is what is preventing societies from going through the self-redevelopment route.
In order for the self-redevelopment to go through, the members will need to think like businessmen, and businesses need capital to take off.
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