The Redevelopment Itch

With little or no unused land available for construction, developers in Mumbai are increasingly treading the redevelopment path. In any case, this is where the future of realty lies, according to most experts. Madhavi Gokhlay attempts to unravel construction’s next best bet. On the face of it, redevelopment should have been the Maximum City’s mantra a long time ago. In Mumbai, particularly the island city, there are an estimated 20,000 dilapidated buildings. No surprise then, that both the state government and the Brihanmumbai Municipal Corporation (BMC) gave the green signal to promote redevelopment as early as 1991. However, possibly owing to the comparative advantages Slum Rehabilitation Authority (SRA) schemes enjoy, least of which is single-window clearance compared to the 40-odd approvals that redevelopment projects require, it still does not appear to have taken off in the same way as SRA. A pioneer in the field for over two decades, Happy Home completed its first redevelopment project in Mumbai in 1993. Prominent by its presence in the central Dadar-Matunga belt, this redeveloper prides itself on knowing the locality and the pulse of the people, and thus believes there is a relationship to honour. “Redevelopment is a field where a lot of human element is involved,” says Umang D Kuwadia, Executive Director, Happy Home. “It’s more about your power to convince, your performance and track record as a developer, not to mention your ability to deal directly with occupants, understand their issues and try and resolve them.” Lalit Kumar Jain, Chairman, Kumar Urban Development Ltd (KUL), echoes a similar sentiment. “Redevelopment is a very tricky and risky business,” he says with candour. “However, it requires less capital investment while being more profitable than open land construction. In most cases, the internal rate of return (IRR) is higher. Significantly, redevelopment requires goodwill, a very good reputation and absolute grassroots level work with tenants-all requisites that we possess.” However, there is a common perception that big builders are unlikely to go for this model except when the scale is huge. “Big builders are big houses by themselves,” says D L Desai, Vice President, Builders’ Association of India (BAI). “To the extent of their size and the structure of their company, they just can’t afford to undertake redevelopment of one or two buildings. They need a huge land mass because they work in small township type of projects, which suit them. It isn’t so much about profitability as convenience,” opines Desai, popularly known as Shankarbhai. Jain disagrees with this view. “Many large developers, larger than us, also want to get into redevelopment,’ he argues. “But it is necessary that you are connected at the grassroots level; so not many will succeed.” Recently, KUL embarked on a series of 18 redevelopment projects across the island city with an initial investment of over Rs 500 crore. Work has already started on eight of these projects, with the promise of delivery by the end of the year. Big corporate houses like Godrej are also eager to scale up their projects in the redevelopment space. “Cities like Mumbai have a limited landmass and the only option is redevelopment of old and dilapidated structures,” says Milind Korde, Managing Director, Godrej Properties Ltd. “While we have done some landmark structures in Mumbai like Planet Godrej and Godrej Coliseum, we are actively looking for big redevelopment projects. This isn’t a new area for us. In the past, we have done redevelopment projects in Cuffe Parade and Shivaji Park. We are only increasing the scale now.” Eligibility for redevelopment When does a building qualify for redevelopment? Regulations for the island city differ from those for the suburbs, explains Kuwadia. In the island city, old dilapidated structures that pay a repair cess to the state government or MHADA are eligible for redevelopment and are covered under DC regulation 33(7). Depending on whether the structure has been built prior to 1940, 1940 to 1960, or later, it qualifies for an FSI of 3 or 2.5 or less. Mill lands in the island city are covered by a separate regulation. Recently, the state government has promoted the concept of cluster development, which is covered under DC regulation 33(9), where entire localities like Bhendi Bazaar and Kalbadevi are going in for redevelopment. In the suburbs, MHADA colonies have now been granted an FSI of 2.5 under the new DC regulation 33(5) and so they can choose to go in for redevelopment in pursuit of additional space and convenience. Also in the suburbs, there is a possibility of consumption of transfer of development rights (TDR), which is intended for societies with conveyance of land in their name. Such societies can go in for redevelopment by demolishing the old building and buying TDR from the open market. “Why do developers talk only about FSI?” wonders Shankarbhai. “Our infrastructure in the island city is above a hundred years old. With redevelopment, you increase the density of population on a given land mass. First, a study needs to be conducted whether the existing infrastructure is capable of taking the additional load. Unfortunately, that is not being done.” The legalities Redevelopment involves complex legal procedures. Rajiv Narula, Partner, Jhangiani Narula & Associates, a practising Supreme Court and High Court Advocate, lists the essentials: 1. While the society might be going in for redevelopment either because the building is old and dilapidated or to derive the benefit of TDR, it must have conveyance in its name; otherwise it won’t be able to negotiate with the developer. 2. Once a decision is reached, the general body passes a resolution for redevelopment. For this, the consent of more than 70 per cent of tenants is required. Typically, the consent letter accompanies the general body resolution. 3. In case of dissenting members, the general body resolution is binding, provided it has been passed as per the January 3, 2009 guideline of the Government of India. The exception to this rule is when a dissenting member manages to point out an irregularity in the appointment of the developer. For cessed buildings, there is a summary eviction procedure available under MHADA, where summary eviction of tenants is possible if they refuse to vacate. 4. After a resolution is passed, tenders are floated to invite offers from developers; the best offer is selected. Before floating tenders, the society must engage its own architect and legal advisor to know the real potential of the plot so it is not misled. 5. The developer has to get his plan sanctioned, for which he needs various no-objection certificates (NOCs), including an NOC from the Assessment Department to the effect that he has paid his taxes fully and correctly till date; an NOC from the airports authority if the building happens to be located near the airport; and so on. 6. While the developer has to take care of temporary accommodation, it is essential to obtain a bank guarantee from him as a safeguard against eventualities. 7. One of the conditions for commencement of construction is demolition of the existing building. Demolition starts once an Intimation of Disapproval (IOD) is issued. After demolition, the Commencement Certificate (CC) is issued. The society should make it clear to the builder that he will not be allowed to sell any flat in the open market unless and until he first loads TDR on to the property as soon as possible. 8. It is critical for the society to know the builder’s financial background and prior experience. 9. For his part, the builder must make sure he enters into a proper agreement with the society, clarifying everything, including at what stage he should be given possession, and make sure each member has given individual consent. 10. Flat owners must insist that they would be given a permanent alternate accommodation, so that once they move out and are brought back by the builder, they get the assured area, with prior knowledge regarding the type of flat, etc. 11. The society must ensure that the project is viable and that its many flat purchasers are getting the same kind of, or better accommodation in terms of facilities and amenities. It must appoint its own architect to supervise the progress of work. 12. Precautions must be followed, like having one’s own architect to supervise progress of work and insisting that the sanction plan be given to the society and not modified without its consent. 13. The builder must make sure that existing members are not burdened with extra tax of the new property. BMC as facilitator When a developer submits the building plan to the BMC, as many as 40 to 50 clearances (NOCs) are sought from various departments of the civic body. These are also known as IOD conditions, implying that the building plan will be approved, subject to all these conditions being fulfilled. While clearances also depend on the size of the project, on an average, it takes around two years to get these. “Societies must select developers who have a track record of completing redevelopment projects within 24 to 30 months,” says Kuwadia. “Getting so many clearances involves visiting at least 15 offices (except in the case of SRA schemes); if the developer has no such experience, the project could easily get delayed by six to 12 months.” According to Jain, “The BMC has the same procedure for every building, except for dilapidated buildings, where it has to expedite its approval process so that there is no collapse or accident.” The proposal is finally approved by the Improvement Committee of the BMC by way of a resolution. A letter of intent informing approval is issued to the developer from the Assistant Commissioner (Estates). “As a planning authority, the BMC is supposed to regulate active construction in the city,” says a senior BMC official, who wishes to remain unnamed. “In conjunction with PEATA (Practising Engineers, Architects, Town Planners Association), we have even published circulars, a building manual and a ready reckoner to serve as tools for architects and civic officials to understand the rules, regulations and procedures, get clarity on their role and responsibilities, and learn how to go about fulfilling them. An important aspect of BMC’s role in redevelopment is the responsibility to ensure that no permanent structure coming up in the city flouts any rules and regulations or places an unnecessary burden on the existing infrastructure.” With this in mind, there are several clearances that builders need to obtain from the BMC: 1. If the project is over 20,000 sq m, an environmental NOC is required under the Environmental Protection Act 1986.2. If the building falls within the Coastal Regulation Zone (CRZ), an NOC from the Maharashtra Coastal Zone Management Authority is required.  3. If there are any trees on the land or even if there are no trees on the land, an NOC from the Tree Authority is required under the Maharashtra Trees Act.4. If an approach road needs to be constructed, an NOC from the Road Department is required.5. In case of a high rise or an assembly of buildings, an NOC from the Chief Fire Officer is required.6. A Storm Water Drain NOC is required.7. A Sewerage Department NOC is required.8. An NOC from the Department of Hydraulic Engineering is necessary to ensure adequate water supply. 9. For electricity supply, an NOC from BEST is required.10. An NOC is also required from the Department of Mechanical Engineering for debris management. This is just an indicative list; in addition to the umpteen permissions, BMC also insists on features such as rainwater harvesting and provision of lifts, which are not really binding on the developer. While provisions of the Maharashtra Regional Town Planning Act allow for a proper projection and planning of city services for a span of 20 years into the future, there are still gaps in what is envisaged and what is actually provided, owing to several reasons, not least of which is the continual influx of people from rural to urban areas like Mumbai. Why is it that SRA schemes enjoy a single-window clearance as opposed to other redevelopment projects that require a laundry list of clearances? The official from the BMC explains that even SRA projects have to obtain the same number of clearances - the only difference is that the concerned people might be located in one office. Society and the developer “In redeveloping old buildings, we have to satisfy the old occupants who have been residing for over 30 to 50 years,” explains Kuwadia. “They have to be given extra space, not to mention temporary alternate accommodation during the period of construction, else rent compensation for the 24 months to stay outside of their property at their own cost, which is usually an ad hoc amount calculated at the rate of Rs 50 to Rs 60 per sq ft. The other compensation is a one-time corpus, which is also a kind of ad-hoc amount given at the time of possession of the new flat to the occupant; the interest from this enables the occupant to bear the new taxes of the redeveloped property.” For his part, Jain says, “While it’s true that redevelopment requires less capital investment compared to open land construction, you still have to give a corpus, the rentals, demolish the existing building, buy out a few flats, implying that a lot of investment is actually happening. For KUL though, it has worked out so there is profit that is ploughed back and liquidity created. Thanks to the trust reposed in us, finances are available. By contrast, open land involves huge investment upfront but we believe in doing more projects with that kind of investment. Besides, vacant land is not available in all locations, which means you have to go where vacant land is available. Not so with redevelopment, where you can call the shots regarding where you want to do it.” Apart from the monies involved, a lot of other issues tend to crop up in the course of redevelopment. “Some societies go scouting around for developers who will give them more in terms of corpus, rent, etc,” says Kuwadia. “Also, some members just don’t give their consent to the process of redevelopment.” The only recourse in such cases is the government’s new guideline of January 3, 2009, which states that 79A Procedure must be followed for tendering and selection of the developer and submitted to the Registrar of Societies; if this particular procedure has been duly followed, dissenting members cannot impede the process. Winners all So what’s the deal here? Why are builders increasingly jumping onto the redevelopment wagon? And what do tenants stand to gain from it? “If you have a kitty of Rs 50 crore and you want to do an open land construction, let’s say you’ll be able to do ‘x’ amount of construction per annum,” elaborates Kuwadia. “Compared to that, maybe in a redevelopment project, you might do ‘2x’. Out of this, ‘x’ you would have to give back to the cooperative housing society or tenants free of cost and the remaining ‘x’ you can sell in the open market. This is mainly why redevelopment attracts a lot of attention, especially from small and medium sized builders. As for the tenants, the benefits are huge. First, they get a totally new lifestyle complete with so many more amenities. Second, GenNext inherits a house on ownership basis unlike their predecessors, in some cases. Third, they get a brand new structure with modern planning, which makes for less wastage compared to the earlier building. And last but not the least, the value of their property multiples nearly threefold by the time the building is redeveloped.” South Mumbai-based redeveloper, Rohan Lifescapes, has completed over 12 redevelopment projects between Prabhadevi and Nariman Point, with 10 more in various stages of construction. Trump Towers, its most talked about project, is also a redevelopment project. “In the island city, where land is scarce, redevelopment is a great opportunity to acquire land parcels in prime locations. Redevelopment is value, not volume. Though logistically it may be difficult for smaller parcels of land, given sufficient amount of domain knowledge, these difficulties can be overcome,” says Haresh Mehta, Chairman, Rohan Lifescapes. “Although the time taken is longer and tenant issues are immense, the upfront cost of land is lower.” Nearly 60 per cent of RNA Corp’s projects fall within the redevelopment category. A key redevelopment project undertaken by the company is Subhash Nagar in Chembur, a MHADA housing colony with 55 buildings of G+3 storeys, spread over 40 acre. The buildings were constructed back in the 1950s and are unable to meet the housing needs of GenNow. “We have successfully partnered with private housing societies, BMC and MHADA to carry out redevelopment projects. This enables us access to land in prime micro-markets without huge upfront investment. The existing tenants or owners of old buildings also stand to gain as they are provided with self-sufficient, robust and quality apartments – a win-win proposition,” says Manoj John, Vice President, Corporate Planning and Strategy, RNA Corp. Talking about the likes of Godrej, while redevelopment isn’t entirely new for the company, it is now actively exploring projects across private buildings, MHADA and HRA properties. According to Korde, “Redevelopment is a huge market, where you have to work with cooperative housing societies that can use higher FSI because of the new development rules. It is also akin to our JV model. We have a separate team working on it and very soon, you will see several projects in the city as well as the suburbs. We have already signed a few MoUs; however, the process takes time.” Tenants will reap huge benefits as brand Godrej has always stood for ethics and transparency. “We have policies and processes in place such as regularly conducting customer and vendor research to understand preferences; executing projects through the JV model, which is asset light and de-risks business; and outsourcing repetitive functions like design and construction by partnering with world-class architects, contractors and vendors to source best-in-class designs, amenities, resources and materials - all to offer better value to customers,” asserts Korde. Reality check Seems like redevelopment has indeed arrived on the construction map-a winning formula for both developers and societies. However, it is advisable to have a practical approach, as Rabindra Hazari, Partner, Rabindra Hazari Associates, a practising Supreme Court and High Court Advocate, rightly points out: 1. Whether you are the builder or the society, ensure that the land on which the building stands has been conveyed to the society. Very often in the case of buildings constructed over 30 years ago, conveyance has not been executed nor registered from the owner of the land to the society for one reason or the other. Obtain the Property Registration Card (PRC) from the municipal records. If it has not been done, get it done.2. The society will be confronted with rival claims from various developers coming up with exaggerated ideas of inflated FSI, etc. In such a scenario, it is essential for the society to form its own independent assessment by engaging its own experts, namely, a legal advisor and an architect, who would act as the society’s filters to critically examine all redevelopment proposals coming from different developers. Unfortunately, societies in their anxiety to avoid spending money, rely on the developer’s lawyer and architect, which is a ‘penny wise and pound foolish’ decision because the society has no way of ascertaining whether the proposals put forth by various developers are viable or not. Also, often in prized locations, there are bidding contests between different developers, who in their anxiety to grab control of the project, make wild and unrealistic proposals, thereby misleading societies, which are unable to critically evaluate competing redevelopment bids.3. Do a background check of the developers by asking them to give in writing the particulars of the projects they have done. They must specifically identify the buildings redeveloped. Try to personally visit the redeveloped building, talk to the society members, learn from their experience, and be guided accordingly. 4. In India, unlike abroad, there is no system of credit appraisal of developers, so it is very difficult to get a true financial picture of the developer. Hence, as a safeguard against all eventualities, always insist on a bank guarantee from the developer covering the entire amount assured by him.5. The society’s architect and lawyer must individually and jointly vet all approvals obtained by the developer. The architect must regularly attend and supervise the construction and certify what stage the construction has reached. 6. It is very important that the society’s legal advisor is consulted by the society on a continuous basis whereby different documents are all first approved by the legal advisor and architect before the society grants its approval. This means that the society has to pay its legal advisor from time to time or pay him a retainer for the entire course of the redevelopment. A ‘fire brigade’ mentality of rushing to a legal advisor with a mass of documents only when you are in trouble will cost you dearly.7. Get your legal advisor to draft a contract that includes penalty clauses for strict completion of work as per an agreed schedule. 8. Insist on a termination clause in your agreement with consequences of termination clearly spelled out. If the developer is unable to deliver the redeveloped structure within an agreed time frame, then all his rights should stand terminated upon payment of an agreed compensation, whereupon the society can engage another developer to finish and deliver the redeveloped structure. Of the 75 rebuilding housing and townships projects under various stages of implementation, Maharashtra alone has 55 projects (Read our Special Report on page 96). Needless to say, opportunities abound in redevelopment; exercise a fair degree of caution, and it can be a win-win for everyone... Modern vs traditional In any redevelopment project, the significance of equipment cannot be undermined. However, opinions tend to differ on the kind of equipment used. According to Kuwadia, the role of machinery is increasing day by day, particularly in demolition. “For our Jade Gardens redevelopment project in BKC (Bandra Kurla Complex), we were able to demolish 10 buildings in less than 40 days, thanks to our usage of L&T Poclains and very heavy duty concrete breakers. We also used ‘controlled blasting’, a recent blasting technique,” he says. “For most activities, including piling, we sublet or subcontract so the contractor or agency brings in its machinery. However, we do encourage the use of heavy-duty piling machines for greater efficiency. We also have available on site, depending of course on space availability, concrete mixers which are essentially batching and mini-batching plants. The advantage is that instead of getting ready-mix concrete from outside suppliers, we get our own tailor-made, ready-mix concrete for M30, M35 or M40 grade concrete. We also have pumps on site so that concrete produced at ground level is uniformly pumped right up to the top, keeping quality in mind, thus helping us do nearly 25 per cent more concreting per day as compared to conventional methods,” he explains. Nowadays, the use of steel formwork and framework is gaining currency and international brands like Myvan are easily available in the market. “Formwork helps cut down the time taken for casting each slab by almost seven days, effectively reducing slab casting time for approximately 15 to 20 slabs by a good three to four months. And the good news is that formworks are now being assembled by Indian companies as well,” he adds. Meanwhile, Jain believes that whether it’s open land construction or redevelopment, the technology used is all the same. “All our machinery is outsourced to listed companies and contractors,” he says. “Yes, materials such as ready-mix concrete and RCC have changed the scenario. But if we are going to construct so many new buildings, we seriously need to revisit our older methods of construction,” says Shankarbhai. From the horse’s mouth Demolition contractor Genesis Engineering has an entirely new take on the matter of equipment. “Old methods of demolition like using chisels and hammers have been eliminated almost completely in new projects,” asserts Piyush Gandhi, Managing Director, Genesis Engineering. “Diamond cutting methods and electrical demolition hammers have replaced the way of handling and working with concrete demolition,” he adds. Genesis Engineering has a bank of equipment which can be used in any of the redevelopment projects it undertakes, as and when required. The company boasts of strategic tie-ups with associates and suppliers, who can provide immediate help whenever needed. “We use concrete cutting machines to cut RCC structures; hydraulic combi cutters mounted on excavators to demolish structures with great speed and safety at heights; handheld hydraulic crushers to crush RCC structures for part-demolition inside buildings; hydraulic splitters and busters and other such demolition equipment,” he explains. The company’s current projects include a new mall in Pune that is altering its shape and size in a big way, a few projects in Mumbai, as well as infrastructure projects like Mumbai international and domestic airports. Material in vogue Just as equipment is important in redevelopment, so is the material used. “For plastering, we use processed sand which does not have too much of silt content instead of ordinary sand. For ceilings, we are now using chemical bonding and gypsum so as to prevent premature falling. In terms of green features, we have started using eco-light bricks (Siporex or Buildtech). We are also adding LED lights, depending on how the construction is envisaged,” says Kuwadia. “With time, newer products like composite steel structures are being considered for speed and for overcoming manoeuvring constraints,” says Jain. “While newer materials are being increasingly used, the industry has to think about how long it will go on consuming natural raw materials and resources like limestone and iron ore,” says a concerned Shankarbhai. “With such a huge requirement, we will now have to think in terms of reinforced plastic or other such substitutes. Otherwise, within the next 50 years or so, we will end up depleting all our natural resources. This is something we need to seriously deliberate upon...” Soil matters Frills aside, the brass tacks are of prime importance while embarking upon a redevelopment project. Once the existing structure is demolished, soil testing and land topography come into play, just as with any other construction project. Kuwadia, who is also a qualified civil engineer, says, “While soil testing is a separate item which is sublet to a contractor, the process involves digging deep into the soil strata and taking cores at every 0.5 m to ascertain the soil’s bearing capacity. The foundation is laid after scrutinising the soil testing report. Also a qualified engineer, Jain, says, “Soil testing and land topography are critical, and we have able technocrats on the job, who generally do their job well.”