Mumbai realty: Why redeveloped properties hold the key

Mumbai: If earnest home buyers were expecting to find their dream home in the new launch market showcased at the Mumbai Property Expo recently, they should think again.

Organized by the Maharashtra Chamber of Housing Industry (MCHI), this year’s property expo did see a host of new launches, but many of the projects on offer had approvals pending for six to eight months.

A Nomura report last week highlighted that home price remained high despite weak transaction volumes, high interest rates and slowing growth as supply has been limited with fewer projects being added, especially in Mumbai and Delhi due to government approval delays.

Property prices rose 24 percent in the last one year against the average 20 percent over the last two years even though sales volumes fell more than 50%.

Also, the average ticket size (excluding PLCs and registrations, duty and taxes) for basic 2-BHK flats in places like Panvel, Airoli and Dahisar were seen upward of Rs 75 lakh, and no discounts were offered, despite the festive season.

Analysts say that if they launch at a lower price today, their existing unsold inventory will get hit.

The extended suburbs of Mumbai (Kharghar, Taloja, Ulwe, Dahisar, Vasai, Virar, Thane, Dombivali, Kalyan) have excess supply, yet the prices are not affordable and only 25-30 percent lower against the suburbs of Vashi, Goregaon, Mulund etc. The typical price for a a 2BHK here is Rs 8o lakh, while a 3BHK costs Rs 1-1.2 crore! Given that these houses already command such a high value, any appreciation can only be expected after three to five years.

“While demand for livable resale units outstrips supply leading to acute shortage and buoyant pricing pressure, the new launches have been scant due to limited land stock in closer proximity to the central business districts,” says Parikshit Kandpal, real estate analyst at Karvy Broking.

Moreover, there were very few ready-possession flats on offer. Those that did exist were at least offering a 20 percent appreciation against an under constructed flat by the same builder in the same location. Most of the new launches were offering deliveries only beyond financial year 2015.

With such completion delays and only few deliveries in financial year 2013 and 2014, it appears as if the builder is is no hurry to sell existing prices, which in simple terms means no price correction. Even the prices for unsold old projects which were displayed in October 2011 Expo were up 10-30% across locations this year.

“Despite upcoming supply, we do not expect price correction in the near future given lack of ready possession projects and delayed execution. On the contrary, revival in demand could push prices for select projects further up,” said Motilal Oswal in a report.

Another reason why these new launches will fail to attract buyers is the high black component required in a real estate transaction. This is a major impediment for a salaried person’s buying decision. For example, even if a buyer has the capacity to buy a Rs 90-lakh house through a home loan, there is no way he can pay 40 percent of that amount in black.

On why builders demand a high (60:40) component, Kandpal says, “According to builders, capital gains only helps government as it doesn’t go into buyer/seller pocket and since most of the transactions are being done closer to the guideline value, he can’t make an agreement more than that. This has led to genuine buyers walking out of deals.”

He adds, that even if the builder agrees for full white, he is bound to add the capital gains tax on cost, which leads to 10-15% increased burden on buyer.

Are redeveloped projects the answer?

Clearly since land availability remains a serious concern in this city, analysts think redeveloped properties hold the key to growth as maximum value lies in gains from increased floor space index.

Take the L&T-Omkar joint venture, which launched its redevelopment project in Bhoiwada, in the Parel area of central Mumbai. At a launch price of Rs 16,000 a square foot, the JV saw 400 confirmed bookings and 150 others waiting within four to five days of the launch.

So why did the project get so much traction?

The answer is location. Rarely does one find an affordable project in the heart of the city and in proximity to the extended business district of Lower Parel-Worli. Yet analysts caution, that the apartments would cost buyers around Rs 20,000 to Rs 22,000 a sq ft, given floor rises and other charges.

The redevelopment of CIDCO properties have already started (these buildings are 30-35 yrs old and eligible for current approved redevelopment FSI of 1.5), says Kandpal.The current incentive being offered includes a new apartment for the existing one with the same carpet area. Some developers are even offering extra area of 30%, resulting in 2BHK converting into 3BHK.

“The icing on the cake lies in case the redevelopment FSI of 2.5 is approved (already there for dilapidated buildings) then the existing owners will demand 0.5 FSI as cash and an extra area for existing 2BHK.”

He suggests redevelopment is going to be the major re-rating story and over next 2-3 years we will see some major price appreciation in ‘Chembur’, ‘Ghatkopar’, ‘Andheri’ and ‘Kandivali.