Mumbai realty: How the builder-politician nexus cheats us
Why Mumbai manages to raise property prices even when no one is buying. The regulations have aided the process of creating artificial supply shortages.
The ordinary Mumbai citizen dreams of owning a home in the city, even if it is in the distant the suburbs, but the nexus between politicians, property tycoons and the powerful builder lobby ensures that no property is priced at affordable levels. And this despite 80,000 flats worth over Rs 1 lakh crore remaining unsold in Mumbai.
A Knight Frank report points out that five of the biggest developers in Mumbai are sitting on debt of Rs 6,200 crore, while they are holding on to a total unsold inventory of Rs 14,300 crore - 14 percent of the total MMR ( Mumbai Metropolitan Region) market.
So why aren't they selling even at discounts to reduce their interest costs? Economic logic dictates this, but when supplies of land are artificially restricted, the laws of economics kick in favour of the realty tycoons.
Mumbai's problem is that land is in short supply, thanks to regulator-imposed artificial bottlenecks that have resulted in delays in new launches, says Samanthak Das, national advisory head at Knight Frank. This is what has helped hold prices up by keeping fresh supplies low.
Before the new Development Control Regulations were put in place in January this year, most developers were exploiting floor space index (FSI) and selling non-salable FSI as extra floor space to consumers by commanding a higher price. "Earlier DCR norms permitted areas like staircases, passage, lifts, AC plant rooms, etc, to be counted as free of FSI, and developers calculated their profits based on the extra areas they could exploit in the building by selling them to buyers," says Pankaj Kapoor, Managing Director at Liasas Foras, a property research and consulting firm.
But with the new proposal to restrict this additional construction - flowerbeds, pocket terraces, decks, voids, etc - to just25 percent of the total built-up area and charge builders a 100 percent premium for had upended construction plans. This is because the builders can no longer pocket the extra space as profit, or dupe consumers by selling them additional space. The move not only resulted in stalled projects but a major drop in launches too.
Some 55,000 units were launched in FY 2012, down almost 40 percent from the 92,000 units launched during FY 2011.
In fact, most of the real estate developers in Mumbai like Indiabulls and Lodha are all in a catch-22 situation because they sold flats in the pre-launch phase even before obtaining regulatory approvals. The net result: Projects are on hold, and prices cannot be brought down because private equity (PE) money has already been invested in these properties. New flats cannot be sold without untangling the DCR mess. But here too it is not the developer that suffers, but the consumer.
"The developer encashed his stock by selling flats in the pre-launch phase, an investor will inevitably make his money, but the consumer is in the hibernation phase of old properties and exceptionally high rates," said Kapoor.
If developers have created an artificial spike in prices, government policies should be blamed for it. In Delhi, it is the difference between circle rates and actual market rates that is causing heartburn; in Mumbai it is additional floor space index to developers for creating public parking. First, the Maharashtra Town Planning Act 1966 was manipulated to ensure that developers could grab the lands of closed mills, then the Supreme Court upheld the sale of nearly 285 acres of mill land for commercial development and the redevelopment of old colonies in prime locations in South Mumbai again led to under-the table dealing.
Take the Hiranandani case, where of the government-sanctioned built-up area for the development of Powai land. Hiranandani utilised only a part of it, while the rest was converted into luxury apartments and sold at a premium. With a net FSI of about 3 crore sq ft and the going rate of Rs 15,000 per sq ft, this misuse of land meant for the poor is estimated to be valued at more than Rs 45,000 crore.
Another example of how flouting FSI rules led to a rise in property prices is Mumbai's most sought-after areas of Bandra and Khar where prices have risen around 300 percent in the last six years and command a rate of Rs 42,000-45,000 a square foot. Why? Because of the land mafia and a new breed of builders linked to politicians and the underworld who built luxury skyscrapers in narrow lanes and sold certain areas of the building illegally.
"The old FSI (floor space index) is the root cause of the problem as builders artificially jacked up prices by illegally selling areas like flower beds, voids, common lobbies, and terraces at market rates to flat buyers, although these areas were not part of the building's floor space index," Pankaj Kapoor told Firstpost. The builders made a killing by manipulating concessions granted to them by successive municipal commissioners and by bribing municipal corporation officials.
However, the new Development Control Regulations in Mumbai will help maintain transparency in deals and benefit customers. But what will work in the long-term has ended up creating a short-term supply bottleneck.
But the real problem is more deep rooted in Mumbai's political and bureaucratic system where our own netas and babus play a big role in making property valuable. How?
By creating a man-made shortage of land for construction. "In Mumbai, state ministers use their discretionary powers to lease out land or buy land at a fraction of the original value of its cost," a Chembur-based broker told Firstpost on condition of anonymity. For example, last month, the Mumbai police busted a illegal construction racket in which over 1,500 residential buildings were developed on land strictly earmarked for agricultural purposes by bribing the sarpanches of 40 villages located in Dombivli and Thane to achieve this end. The villagers were promised that they would be allowed to enjoy profits from 40 percent of the flats sold, but the builders, of course, retained the lion's share of profits.
"Investigations related to the shocking case have revealed that the project was financed by elements from the underworld with direct links to dons Chhota Rajan and Ravi Pujari. Abetting these dubious deals were two incumbent MLAs," a Mid-Day report said.
Most politicians and bureaucrats in Mumbai grab valuable real estate in Mumbai, forcing the middle class to hunt for properties on the outskirts like Virar, Belapur and Dombivli. The Adarsh Society scandal too reflected how Mumbai's resources are looted and exploited to only fill political coffers . No matter which party is in power, it is the builders' lobby that is all powerful.
But how does the black money enter the market?
A builder will meet a politician and arrive at, say, Rs 50 crore as the entire cost of the project, which includes clearance and land acquisition. The politician's money is then routed to the builder from front companies floated in Dubai and Mauritius, which is then pumped into such real estate firms in the form of foreign direct investment, a Delhi-based builder told Firstpost.
The builder already books his profit during the under-construction period by selling flats as tradeable commodities and then has the capacity to hold on to flats at the high prices and make even more profit. On the base agreement with the politician, the builder will repay some amount of the politician's money and the balance with an additional profit of say Rs 20 -30 crore is returned after five years by way of other PE investments .
Another reason why builders insist on 60 percent of the transaction being in black is because of the innumerable payouts they have to make to politicians, officials in the revenue department, etc, to fast-track the project. " The builder is under pressure to pay a certain percentage of the land deal to the builder either in the form of cash or in the form of a flat in a posh location", said another industry expert. In fact, projects are stuck midway for six to seven years because the developer has been unable to meet the promises he had made these government officials.
So unless there's a transparency revolution or strong government action to end this nexus, the mess in India's real estate is not going to get cleaned up and genuine buyers will keep waiting for the prices to fall.
As an editorial in the Economic and Political weekly says, "In 'India Shining', regulatory capture of different kinds (changing regulations, bending rules, discretionary allotments, etc) in infrastructure meets the needs of all sections of the powerful: it oils the machinery of the political parties, it lines the pockets of senior politicians and bureaucrats and, of course, it benefits those corporates who at a price are able to get the rules changed in their favour."
Subscribe to Moneycontrol Pro at ₹499 for the first year. Use code PRO499. Limited period offer. *T&C apply
If you are thinking of buying a ready-to-move in property or a flat from the secondary market, make sure you scrutinise all the necessary documents or else your dream home could turn out to be an expensive disaster.
Thanks to skyrocketing real estate prices, lakhpatis of 2005 are now crorepatis in real estate terms. Mumbai is now out of reach of the middle class
Lodha has probably got away with a steal in buying DLF's 17-acre property for just Rs 2,700 crore.