Thursday, November 29, 2007

Is ULCRA repeal in Mumbai relevant?

As the Winter Session of the State’s Legislature gets underway in Nagpur, newsflow on the repeal of the Urban Land Ceiling Regulation Act (ULCRA) has picked up again. Today’s DNA reports that the ULCRA might be repealed today itself. Remember, the Act needs to be repealed to get funds under the Centre’s JNNURM.

While similar newsflow was active even least year during the Winter Session, nothing happened for a year. The ULCRA repeal escaped the Budget Session (March 2007) and the Monsoon Session (July 2007). Now, with the winter session underway, we’re all talking about it again.

So, will it or won’t it?

Current political thinking:

Ruling Congress-NCP Party: Chief Minister Shri Vilasrao Deshmukh, once a proponent of the ULCRA repeal, is now cautious, choosing instead to say vague things like:
"It is true that the discussion on the issue has remained inconclusive during last two session, but the business advisory committee has decided to take it up again on November 21," said Deshmukh while addressing the media at his official residence Ramgiri on Sunday.

Deshmukh further added that bills were always placed before both Houses of the legislature with the intention of passing them, but it would be breach of privilege if he announced that the same would certainly be passed.
BJP: In favour of repealing, simply because it was their Government at the centre which formed the JNNURM in the first place, calling for reforms such as repeal of archaic and pointless laws like the ULCRA.

Shiv Sena+Left+smaller parties: Against repeal, on the grounds that the Government must, instead, implement the Act, acquire surplus land and use it for affordable housing in Mumbai. Newspaper reports indicate the Sena, led by Opposition Leader Ramdas Kadam, wants loan waivers to the Vidarbha farmers as a quid pro quo for them to agree to the ULCRA repeal.

Here are the numbers at stake:
Per this HT article, the total surplus land across Western and Central Suburbs in Mumbai is estimated at 3,600acres. To put things in perspective, the size of the Mumbai Mill Lands was estimated at about 600 acres (or 400acres per the SC verdict, 7-Mar-06, page 71).

Now, of the surplus 3,600 acres, the Government has already taken over possession of about 2,300acres. The balance 1,300 acres still vests with the owners. And who are the owners? Take a look below (Source: Page 2, HT, dt. 28th Nov 2007)

However, the owners are disputing the Government’s claim that this land is surplus. Therefore, all of the 3,600acres is under litigation. What then does the ULCRA repeal mean for this surplus land? No clear answer, but here’s what might happen (from the HT Article)

(a) The balance 1,300 acres not in Government’s possession goes back to the owners

(b) The 2,300 acres of land acquired by the Government goes into courts and dispute between the owners and the Government . Legal cases, as we know, will then go on forever

(c) The Government gives back the land to the owners (as was the case in a similar situation in Gujarat in 1999)

Mumbai's demand-supply myth
Conventional thinking would suggest that increased supply of land would bring prices down? Before you say yes, consider this. There is no demand-supply concept in Mumbai ‘s real-estate market. As long as builders control the supply of land in Mumbai, they will dictate prices. Thanks to the overall economy's blistering growth, demand for Mumbai’s property remains high. And with supply being completely constrained, property prices will, in all likelihood, only increase.

Don’t believe me? Consider these two cases, one each in commercial and residential property, both spanning the last 2-3 years.

(a) In July-2005, IndiaBulls purchased 8acres of Elphinstone Mills Land for Rs441crores, a deal termed ridiculously expensive at that time. But, aided by a generous FSI allotment on that land, IndiaBulls has converted that 8acres into prime commercial property. In the process, they’ve probably more than made up their purchase price and, if their stock price in these last two years is any indicator, will also land up making a killing on the transaction.

(b) Suburban Mumbai has seen it's traditional ground+2 storied structures being converted to 10floor+ structures, thanks to the TDR policy (which allows builders to increase FSI on older buildings, if they surrender land for public use to the Government). Despite the huge supply that has come into the market thanks to this transformation, property prices have only increased.

So if conventional thinking goes that repealing the Act will unleash loads of land into the market thereby bringing property prices down, nothing could be further from the truth. My own guess is that once builders eventually get their hands on this prime Mumbai property, they will convert them into villas and such-like for the super-rich. What’s left will be used for commercial development.

Best case, some itsy-bitsy bits of land might be handed over to the Government as a compromise to end the litigation. That way, the Government might even come out looking good, claiming that it will hand over these lands for “affordable housing” to the public. And if you believe that, you’ll believe anything.

Update: ULCRA was in fact finally repealed, more here.