Thursday, December 07, 2006

Full House Mumbai

The following piece appeared in this week's Hafta, where I'm also now on vacation for about a month. Regular posting on this blog will also come down till year-end given chutti commitments.

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What will it take to get real-estate prices in the city down? If the Government was to be believed, increasing supply of land is one such measure. In fact, recent Court verdicts in the city are also expected to release large tracts of land for development.

We take you through some of these key Government decisions and court verdicts, all of which are focused on real estate issues in Mumbai.

1. The Mumbai Mill Land Case - In March 2006, the Supreme Court freed up redevelopment of Mumbai's Mill Lands by holding that that the term "open spaces" does not include lands vacant after demolition. The interpretation of this term lay at the heart of a protracted battle between environmentalists and builders. The Supreme Court verdict which paved the way for mill owners to retain, and hence redevelop, a higher area of their mills, was supposed to have helped in raising supply of land and ease property prices. Blame it on bad execution on the part of the Government but nine months after the verdict, property prices in the Mill Land area, as well as in the suburbs (where prices were supposed to have crashed with land now becoming available in areas closer to the central business district) have only gone up.

2. Housing Policy – The first-ever housing policy released by the Maharashtra State Government last month was a directionless damp squib with the only key highlight being a move towards a transparent carpet-area based mechanism for land transactions. As discussed in an earlier Hafta piece, the Government, in what seems to be a na├»ve assumption, expects this move to bring property prices down. Another proposal in the policy provides for a higher floor-space-index (FSI) in Mumbai's extended suburbs, which again implies raising supply. Experts and planners do not expect any meaningful impact from the draft housing policy. And other than the Chief Minister himself, no one seems to believe that any measure in the housing policy will get real estate prices anywhere in the city to come down.

3. Repealing the Urban Land Ceiling Regulation Act (ULCRA) – A product of the Emergency era, the ULCRA, is aimed at enabling the Government to acquire surplus land to provide housing for the masses. While the Government has fallen abysmally short in this noble intention, builders, thanks to politicians, have found their way around the Act by using exemptions. Repealing the Act is also necessary for getting infrastructure funding under the Jawaharlal Nehru National Urban Renewal Mission (also discussed in an earlier Hafta piece). The Chief Minister expects that repealing the Act would increase supply of land in the market and hence get real-estate prices down. Yet again, the CM's theory has not found too many takers and experts and planners do not expect repealing of the Act to cool off real-estate prices in Mumbai.

4. Lifting restrictions on congested corridors – The Bombay High Court recently upheld the Maharashtra State Government's policy on transfer of development rights (TDR) and lifted restrictions (earlier in place post a PIL filed by Bhagwanji Rayani) on constructions in certain corridors between the Western Express and Eastern Express Highways. TDR, a development right given to builders that surrender land to the Bombay Municipal Corp., has also been termed a "boon" for co-operative societies of old buildings. Following the introduction of TDR (in 1991) many suburban societies have given up their old structures to builders in return for larger flats in newer – and taller – buildings. The Bombay High Court's verdict effectively releases more area for development and is expected to cool off property prices in the suburbs. The jury's still out on whether this measure will bring down real-estate prices in the city, but don't expect to find too many believers here - TDR prices themselves rose 20% in a single day after the verdict.


Going through these verdicts and Government decisions, one is tempted to see the builders smiling all the way to the bank. After all, this is a city known for its builder-politician nexus.

One key issue is the kind of infrastructure that would be required to bear the burden of more houses, more families and more businesses. The MMRDA is already having a tough time meeting targets for its existing projects, so we'd rather not do any crystal-ball gazing on the impact of these new constructions on the city's infrastructure.

However, no crystal-ball gazing is required to predict where property prices in Mumbai are headed. If recent deals are to be believed (for e.g ., the 3,000 sqft. Cuffe Parade flat which went for Rs22crores, i.e. Rs73,000/sqft) the only way seems to be up.

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