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Are Policy Hindrances Killing Mumbai Real Estate?

Monday, June 04, 2012
By Mayura Shanbaug

According to the 2011 census, the Mumbai Metropolitan Region has over 23.5 million people. To house this population on the ground floor, assuming a household size of 4 and dwelling units of 900 sq ft per family, which are laid wall to wall, we would need 121,384 acres of contiguous land. If all these houses are built facing the street (for access), providing a frontage of 20 ft to each unit, the total length of the street would be 35,606 kilometres!  

It’s a stupendous task to provide housing to so many for any government in the world, add to it the lack of funds, land shortage, environmental issues, restrictive land use laws and regulations and to top it all rampant corruption which results in a scenario that is today’s Mumbai City.  
According to Research and Real Estate Intelligence Service, Jones Lang LaSalle India, being the commercial capital, the city not only attracts migrants from all parts of India, but also has a high floating population, which commutes to the city for work everyday. This high density calls for developments to be vertically stacked by design, with multiple functions layered one over the other. Nevertheless, the proposal for increasing the Floor Space Index (FSI) in the city, which would enable more construction over the same land area, has always met with stiff resistance on practical, sustainable and ethical grounds.

“Real estate developmental density in Mumbai has not kept pace with the growth in population density. Due to the huge pressure on the city’s already scarce land resources, market forces have tended to circumvent the base FSI regulations and build more through ‘discretionary approvals’ in lieu of construction of civic amenities such as parking structures,” says Subhankar Mitra, Head, Strategic Consulting (West) Jones Lang LaSalle India.

Recently, the Government disapproved of these discretionary approvals for construction and came up with amendments in the Development Control Regulations. To increase transparency and remove layers of regulations, an all-in FSI calculation which includes the FSI -free design features have been stipulated. In lieu of lost volume of construction, developers can build 35% extra (as Fungible FSI) by paying a certain premium to the Government. This could keep the construction volumes nearly the same, as developers used to overbuild nearly 25%-30% as free features FSI.

However, developers would now be more inclined to include this extra 35% as usable carpet area in the properties, resulting in better efficiencies in terms of carpet area-to-saleable-area ratios.

 “We could see more box-like residential towers which provide a maximum habitable area to the tenant, instead of lavish architectural projections such as balconies and other design features. The purge of discretionary approvals would also make the industry a more level playing field for developers,” adds Mitra.  

But the developers of the city do not agree. “Any developer in the city has to go through 49 permissions before they can start construction on the project which takes anywhere between 2-3 years, plus the bribes paid at all levels increases the cost of the project manifold,” says Lalit Kumar Jain, Chairman, Kumar Urban Development & President, Confederation of Real Estate Developers Association (CREDAI). “There are around 400 building projects pending for approval in the aviation department itself,” he says.

“There is an urgent need for a single window system for the real estate sector, if such a thing is made possible, then rates could actually come down to the tune of at least 20% and the benefit can be passed on to the consumer. It’s only in India, where a project is held up for a period of 2 to 3 years and no one is held accountable,” he says.

He also pointed out, the developer and the customer is forced to adopt unscrupulous means like the use of Black money to save on high taxes.

“Blanket permission or single window clearance is not possible for all the projects as there are various departments involved, says Sachin Ahir, Minister of State for Housing. “However, that can be done for specific projects or departments.” says he.

“As far as various clearances and time overrun in getting approvals is concerned, the real estate industry need not beat around the bush and come out openly. There may be some loopholes, but if they are ready to discuss them, I am willing to assist them,” says Ahir.  

Incidentally, wherever major housing clusters are created, the government is making it compulsory that around 20% is kept aside for the economically weaker section, lower income group or middle income group. This rule is expected to create more housing in the affordable segment.

Ahir explains the slew of decisions taken by the government will give the much-needed boost to the realty sector. ”The FSI of 3 for redevelopment of old and dilapidated buildings, redevelopment of sector five of Dharavi and restart of 400 redevelopment projects would lead to availability of more and more houses and this would definitely lead to a price correction in the Mumbai’s realty sector within six months,” he says.  

Ahir feels that there is a scope for rationalisation of prices, once the housing stock is increased. “At the outset, I must clarify that the government is not against genuine builders and developers. They have contributed much to the creation of the city, especially by constructing housing stocks. There was a perception among people that there are some developers trying to dictate the policy to the government. However, it was never so. I want to make it amply clear that builders and developers cannot dictate policies to the government, but only hold discussions,” he says.

“One needs to understand that policies can be declared, but implementing those policies is a big task. People need to understand the psychology of development - there needs to be a humane face to it. There are always two sides to everything: when we undertake major demolition, they criticise us and when we don't undertake demolition, then also there is criticism. We have a vision and we are implementing it slowly and steadily. You will see the results in a few years,” he adds.

From a city-level perspective, it is important to understand whether the large volumes of investments in land have actually delivered a proportionate development of real estate stocks in the city:

 Prime Residential Unit Launches

Year 2007 2008 2009 2010 2011
New Launches
(No. of Prime Residential Units)
21,870 24,747 66,796 80,592 61,907
Cumulative Growth 21,870 46,617 113,413 194,005 255,912

The data indicates that about 2.5 lakh dwelling units have been launched in Mumbai over the last five years. Some of this stock has been constructed and delivered, while part of it is still under construction or at the approvals stage. If, for the sake of an argument, we consider the entire stock of dwelling units and the average investment for the land component per dwelling unit, it works out to over a million rupees.

In other words, the direct beneficiaries of these real estate investments are, at best, about 2.5 lakh households (considering one family occupying one dwelling unit) or less than 10% of the city’s population.

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