Summary
Highlights
The discussion begins with the observation that societies are becoming increasingly unreasonable in their demands during redevelopment. Historically, societies sought reasonable extra area, corpus, and rent. However, current demands have escalated to 150% extra area, fueled by developers making exorbitant offers, leading to a 'greed' driven ecosystem. This raises concerns about the sustainability of such projects, especially if the market experiences a downturn.
Mumbai's redevelopment is unlocking significant value, with many new constructions stemming from this process. Boman Irani and Gulamzia join the discussion to shed light on this trend. Mumbai has undergone a makeover, moving from non-architectural styles of 50-year-old buildings to more structured development. The influx of people led to rapid, often unplanned construction, and the proliferation of slums. Shapoorji Pallonji recognized the opportunity in redevelopment around 2000, driven by data indicating numerous dangerous buildings in Mumbai. Redevelopment became a lucrative business due to the scarcity of open land.
Initially, societies were more concerned with the developer's timeline and offerings. However, the focus has shifted to short-term financial gains, with societies demanding excessive corpus, rent, and extra area, often comparing offers like a 'casino.' This pressure makes it difficult for reputable developers who prioritize quality and timely completion to compete with those offering unrealistic promises. This 'greed' could lead to abandoned projects if market conditions worsen.
Mumbai's development is categorized into three main types: rare greenfield projects, massive slum redevelopment (SRA), and society redevelopment. Slum redevelopment accounts for 53-55% of the city's development. Society redevelopment, comprising private and MHADA societies, currently makes up only 12-13%, despite a huge need given that hundreds of buildings are declared dangerous annually. The slow pace is attributed to unreasonable demands and a lack of the right ecosystem and mindset.
The current demands for extra area have soared from 35-40% five years ago to 150% today. This aggressive bidding by some developers is driven purely by greed. If the market turns, many projects will be left incomplete, leaving residents vulnerable. A cautionary message is to prioritize commitment and timely delivery over exaggerated offers, even if it means accepting a slightly lower percentage gain, to ensure project completion and stability.
The introduction of Project Management Consultants (PMCs) was intended to ensure fair processes, but many entered for quick profits. Some PMCs manipulate developers into making exorbitant offers. New developers, lacking experience and financial muscle, are also making unrealistic promises to secure projects. This can lead to projects failing if there's a market downturn, leaving societies in limbo. Developers warn against blindly trusting the highest offer and emphasize the importance of financial stability and a proven track record.
The FSI (Floor Space Index) rules in Mumbai are complex, governed by the DCPR (Development Control Promotion Regulations). FSI varies based on road width and type of redevelopment (e.g., MHADA, slum). While higher FSI is available, it comes with premiums, obligations, and mandates for open spaces. Redevelopment costs increase with height and specific rules for rehabilitating slum dwellers. These complexities make each project unique, and developers often struggle with societies demanding unrealistic gains given the inherent costs and risks.
The real estate cycle is typically 10 years. Post-COVID, Mumbai's market has seen an upswing and is currently reaching its peak. Indicators like stabilizing prices and falling sales velocity suggest a potential downturn, possibly within the next two years. If this happens, projects with thin margins or developers lacking sufficient financial cushion will face significant challenges, leading to stalled constructions and abandoned buildings. Concerns are raised about societies over-optimizing for immediate gains without considering market realities.
Beyond FSI, technical details like covered balcony areas and garages in old buildings add layers of complexity. While old structures might have utilized these spaces informally, new developments must adhere to regulations, impacting the equivalent area residents receive. These 'minor details' can be game-changers in negotiations. The selection of a competent and ethical Project Management Consultant (PMC) is crucial, as a wrong choice can derail the entire redevelopment process due to conflicts of interest or lack of integrity.
Selecting a developer requires careful consideration beyond financial offers. Key factors include: the developer's pedigree and experience (ideally spanning at least two property cycles), their local presence in Mumbai (to ensure long-term commitment), and their financial ability to weather market fluctuations. Quality of construction, attention to structural details (like epoxy coating for steel, waterproofing), and a focus on long-term sustainability are also vital. Societies should seek developers with a proven track record validated by previous residents in the same locality.
Societies must understand that they are the land owners and thus bear significant responsibility, even under RERA regulations. Any default by the developer subjects the society members to potential legal action from new apartment buyers. This highlights that redevelopment is not just about financial gain but also involves shared liability and commitment. Societies should prioritize timely completion, quality amenities, and transparent communication, moving beyond mere financial incentives.
Developers view redevelopment as a strategic long-term opportunity rather than just an IRR game, especially given the scarcity of greenfield projects in Mumbai. While initial costs for redevelopment have increased, they are still often less than purchasing land outright. Reputable developers aim to create micro-markets and focus on building quality structures and amenities that benefit entire communities, ensuring repeat business and a positive reputation. This includes investing in public spaces and infrastructure.
Redevelopment significantly impacts Mumbai's rental market. The small percentage of residents temporarily displaced by redevelopment search for rental homes, often with deeper pockets due to the rent compensation negotiated with developers. This artificial demand can inflate rental prices, making it difficult for long-term residents. The concern is that if developers default on rent payments during a market downturn, residents will be unable to afford their temporary homes, creating further havoc in the housing market.