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Mumbai’s real estate is on its deathbed. It’s time to bury it

Mumbai’s real estate is on its deathbed. It’s time to bury it

My last column asked the question ‘Who killed Mumbai’s real estate?’ When I highlighted the scale of distortion that the proliferation of slums had caused, many readers asked me on Twitter and Linkedin about the possibility of real estate reviving in the city again.

The short and long answer to that is: Never. That’s because real estate cannot legitimately thrive in a city that has collapsed. Cities rise and crumble over a period of time but there comes an inflection point beyond which there is little scope of redemption. That year is 2019-20.

From this year onwards, the wealth of the powerful municipal corporation will wilt sharply. The annual revenues of Brihanmumbai Municipal Corporation (BMC) will probably remain in the vicinity of Rs 25,000 crore but that will mean nothing for the city. BMC’s finances from this year onwards will primarily be used to pay its employees.

Now, BMC has long been an organisation that loves its employees. How else does one explain that its chief engineers get a salary almost on par with the President of India?

Besides, it uses the practice ‘overtime pay’ to the hilt, routinely allowing even a driver to earn even more than the Municipal Commissioner.

This year, expenses will skyrocket. That’s because, after the implementation of the 7th Pay Commission, salaries and wages account for a whopping 76 percent of revenues (like BSNL). This ratio was less than 50 percent four years ago.

The ratio may even worsen further as revenues stagnate or fall. That’s because the two biggest sources of income — property taxes and development charges — are under severe threat.

Property tax revenue is generally around 20-25 percent of total revenues but that will in all likelihood fall given the political promises of its waiver for homes below the size of 500 square feet. Development charges – the various premiums taken from builders are under stress as inventory piles on and builders refrain from new construction. I have no sympathy in this regard as no organised player has been as responsible for unaffordable real estate as much as the government and municipal body.

Redevelopment advisor and expert Nayan Dedhia points out that often a whopping 30-42 percent of a project cost goes towards taxes (state and central), levies and premium charges. Note that two-third of the projects in the land-starved city are towards redevelopment. This excludes the premium paid for ‘smoother clearance’ of files which ranges anywhere between Rs 350/square feet to Rs 1,000/square feet.

Prices are still too high

There are some who argue that as the financing environment improves even the real estate market will revive. Others point out the upcoming connectivity due to the Mumbai Metro. I hate to break this optimism but all evidence suggests that the real estate market was weak even when financing was easier. Connectivity with the Metro construction is a positive when it gets completed (and politics may still hurt it) but it is likely to normalise prices across the city rather than provide highs and lows to locations based on their current connectivity.

The bottom line in Mumbai’s real estate is this: Prices are yet too high and the prime reason for high prices is the state and municipal body. Tough financing is only a peripheral factor in the stalling of 6,000 redevelopment projects. Most of them are stalled due to unviability and many more will join the list going forward as well.

The disdain with which authorities view end-buyers is best demonstrated in their approach to the Ready Reckoner Rate. RRR has two uses – 1) When a builder goes to buy premiums from the BMC – its pricing is derived on the basis of a percentage of RRR. 2) When a buyer buys a flat from a builder then he pays a stamp duty and that has a relation to the RRR. Higher the ready reckoner rate – greater is the amount that builders have to pay for construction and greater is the amount of stamp duty that consumers pay while purchasing a flat. Both result in a higher purchase price for the flat and have caused enormous demand destruction. Such is the level of delusion in the minds of authorities that today most areas have an RRR higher than the market price. The market price may fall but RRR rarely ever does. Example: Lower Parel had RRR in 2013 of Rs 2,81,900/square metre. Despite keeping it unchanged for the last two years – its current RRR is 43 percent higher than 2013 levels even as market prices remain largely unchanged in the last 6 years.

What next? One option for the corporation is to slash charges on real estate heavily and hope that demand for redevelopment will kick in again on account of financial viability. That has many complications with regards to the inventory of existing projects that are complete but remain unsold. This is a high-risk option and may hit the BMC’s already precarious position which will force it to cut municipal services.

Second option: It trims its own expenses and resorts to austerity. This will mean trimming expenses leading to weaker municipal services and a poorer standard of living for the city. Which municipal services will be impacted more or less is debatable but what is certain is that in both the scenarios there is likely to be a cut in municipal services to the residents. In that scenario – why will there be demand for a long-term commitment like real estate purchase? Investors left the market seeing no returns and end-buyers are not entering the market seeing no value.

There are enough worthy battles to be fought in the world of real estate. Mumbai’s real estate is not one of them. It’s time to make it official and take it from the ICU to the morgue.

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