The recently-released Maharashtra State Housing Policy proposes redevelopment of buildings in 104 layouts of the state-run Maharashtra Housing & Area Development Authority (MHADA) in Greater Mumbai. A developer will be eligible for an FSI (Floor Space Index) of three for the redevelopment of a plot up to 2,000 sq mt, and can get an additional FSI of one by paying a premium and sharing the housing stock with MHADA. Redevelopment of plots beyond 2000 sq mt will get an FSI of 4.

The government expects at least 30,000 houses to become available with the new policy on MHADA lots in Greater Mumbai, and proposes redevelopment of old or dilapidated buildings in the suburbs. This will be carried out under a cluster scheme, currently applicable only to the Island City of Mumbai. At least 10,000 old or dilapidated buildings from the suburbs are expected to get a makeover.

In addition, the policy gives a thumbs-up to the redevelopment of 40 MHADA transit camps housing over 22,000 tenants across Mumbai. It also states that the government is looking at rehabilitating over 50,000 slum dwellers on Mumbai Airport-owned land.

How will the new policy impact the Mumbai residential markets?

The Supply Perspective

Will housing supply actually increase? It may. Probably for the first time, the government has given a true incentive to developers to look seriously at redevelopment in the suburbs. Since the area offered for redevelopment includes MHADA lots and not simply buildings, the fragment areas included in these lots provide an incentive to developers to look keenly at redevelopment. Development of single buildings has not been too attractive to developers, as the trouble of tenant relocation, legal hassles with eviction and lengthy approval processes often exceeds the financial returns.

While supply is expected to go up, at what price will the new supply be available? Will this lead to softening of rates in the market? The construction costs for developers have been on the rise, and will be high for these redevelopments too. With increased ready reckoner rates, the premium to be charged for additional FSI is also likely to be considerable. In addition, the developers need to set aside finances for approval processes, rentals, corpus, relocating tenants as well as for infrastructure in case of cluster developments. Redevelopment is also a cash-intensive exercise, so developers need to be well capitalized.

Keeping all these costs in mind, at what price they will be able to offer the product to the masses of Mumbai for whom the policy is actually intended remains to be seen. Only then can one debate the question of the impact on residential markets, and specifically on sustainable pricing. The truth is that pricing of properties by builders is beyond government directives, and if developers have to keep their margins intact, prices will need to find their own way if the whole exercise is to make sense for developers.

Access to easy finance often dictates the speed of construction activity – and in turn the final price of the product. Banks are usually wary of funding developers for re-development projects because a number of redevelopments projects have got stuck in the past due to legal issues with tenants. Relocating tenants to transit camps has been a controversial issue and in some extreme cases, MHADA had resorted to forceful eviction. So, while supply may increase, the pricing in residential markets may not reduce.

The Demand Perspective

While there is always a latent demand for affordable housing in Mumbai, we need to see where these MHADA lots put up for redevelopment are located. Will these areas indeed meet the demand? Our data shows that there has been a 17% jump in sub Rs. 1 crore housing supply in Mumbai in the first half of 2016 when compared with the second half of 2015. This means that developers are already aligning themselves with the market needs, and increasingly focusing on mid-income housing. Additional supply will be absorbed if it is priced correctly and is at a good location. The issue facing most of the affordable housing projects today is the lack of infrastructure connecting these markets to office destinations.

Location of these redevelopments projects is important not only from the absorption perspective but also from the point of view of sustainable development. Infrastructure developments in the Eastern suburbs and Navi Mumbai have marched far ahead of developments in the Western suburbs. Loading the already creaking infrastructure of the Western suburbs with the lure of additional FSI to developers will prove disastrous.

The original Maharashtra Housing Policy note from July 2007 states that some of the main objectives of Cluster development are:

1. To transform the fractured development into a cohesive urban unit as laid down in Development Plan.
2. To provide modern accommodation and social services which raise living standards and reduce disparities amongst different sections of population
3. To provide an environment which permits the residents of such areas to live fuller and richer lives free of physical and social stress that are generally associated with haphazard urban development
4. To facilitate development and proper maintenance of infrastructure facilities such as sewerage / storm water drainage / DP roads which cannot be developed because of the present haphazard development.

Keeping in mind the original objectives of the housing policy, which specifically mentions ‘a fuller and richer life, free of physical and social stress’ the recent policy needs to ensure that the additional FSI be allotted in areas where the load on infrastructure is not excessive.

Despite the government’s attempts at providing housing for all, we have to now wait and watch whether the new Housing Policy will truly give a push to affordable housing in the city.

Ramesh Nair, COO – Business & International Director, JLL India