Boman Irani, managing director of Rustomjee, calls it an “asset-light model” for Mumbai’s real estate developers that offers a huge respite from an ever-increasing expenditure for land purchases. Irani should know as Rustomjee, which trades as Keystone Realtors, is the largest operator in redevelopment space. “Redevelopment will continue to serve as a key driver of growth…We are strategically positioned to capitalise on the current momentum,” Irani said after declaring the company’s second quarter results.
But local players like Rustomjee are up for some serious competition as property developers from across the country have warmed up to the idea in a city where real estate counts among the most expensive in the world. Mumbai is land-locked and land prices constitute 30 to 50% of the total project cost.
Both the scale and economics are added attractions. As per industry body CREDAI-MCHI, more than 25,000 buildings in the Mumbai Metropolitan Region (MMR) with an estimated value of Rs 30,000 crore are qualified for redevelopment. As per Municipal Corporation of Greater Mumbai (MCGM) norms, any building that is over 30 years old is declared dilapidated by MCGM and can qualify for redevelopment.
“A lot of FSI (floor space index) is available to be consumed in old buildings. So a lot can be developed,” said the chief financial officer of a real estate company which is doing redevelopment projects in Mumbai. FSI means permissible development allowed on a plot of land.
The CFO said it is a great preposition for the developer as no upfront payment is required. “If the whole project is of 2 million sq ft, you give 1 million and get the same for yourself,” he said. Rajat Rastogi, CEO-West at Bengaluru-based Puravankara, agrees. “Mumbai’s redevelopment market is highly lucrative, offering significant opportunities for developers with the capability to execute complex projects,” he said, adding that the government’s support, through policy reforms such as easing development regulations and redevelopment incentives, is further driving this segment.
Puravankara forayed into Mumbai redevelopment in November 2023 by securing the redevelopment rights for two housing societies in Andheri West which has 3.65 lakh sq ft available for sales. It is also doing 2.5-acre redevelopment project in plush Pali Hills area and Breach Candy in South Mumbai and is in advanced talks with many societies for redevelopment projects.
Raymond group’s Raymond Realty is yet another player. “Residential societies are getting redeveloped everywhere in Mumbai. So the pace of redevelopment is large. Our idea is how can we be part of it,” said chairman Guatam Singhania in a recent interview with FE. The company has launched a redevelopment project in Bandra and is working on planning and approvals for another three projects in MMR, said Harmohan Sahni, CEO of Raymond realty.
With new players entering the space and existing ones going aggressive, “developers are outbidding each other to secure big redevelopment projects” and residential rents have shot up due to huge demand for rental accommodation, Singhania said.
“If you want to do projects in Mumbai, you can’t ignore redevelopment as there is no land,” Amit Bagri, CEO at Kotak Mahindra Investments (KMIL) said on rising competition. “That’s why new players are getting into this,” he said.
Last year, DLF, the country’s largest listed developer, got into Mumbai to jointly develop a slum rehabilitation (SRA) project in Andheri West. After bagging the rights to develop Dharavi, touted as Asia’s largest slum, Adani Realty, part of the Adani Group, has emerged as the highest bidder to develop 24 acre land in the Bandra area of Mumbai.
However, it’s hardly roses all the way. The share of listed developers In Mumbai redevelopment is still just about 30% and the majority is controlled by unlisted, local players. “Since SRA is tricky one, redevelopment is a much clearer business. Hence everyone wants to get into it. This is the most overheated market I have ever seen,” said Gulam Zia , senior executive director at Knight Frank.
“Three to four years ago, 25 to 30% was the norm for additional space. Now it has touched 50% . Project feasibility goes for a toss if markets turn bad,” Zia said.
Priyansh Kapoor, CEO-Mumbai Zone, Godrej Properties, says acquisition cost has seen a rise due to scarcity of open lands, competition and entry of new players. “There is a possibility that some developers in their endeavour to ride the current upcycle, have become ultra-aggressive in their offers to the societies,” he said, adding that Godrej is watchful as some of these offers are on single-digit low margin.
These margins can easily be eroded due to cost increases and/or price correction. This in turn may create stress in the system and possibility of stalled projects, Kapoor said .
The company, which was an early entrant in the space, has done a dozen redevelopment projects in the city. Societies should be watchful and keep long term execution, brand repute and ability to deliver in mind before awarding such projects, he said.
Concerns have emerged on the viability front. Anuranjan Mohnot, founder and managing director at Lumos Alternate Investment Advisors said there is a stiff competition between Vile Parle and Lower Parel. It’s stiffer between Bandra West to Pali Hill areas, home to many Bollywood Stars.
Mohnot said societies also play smart. “Many times we have seen they accept the bids and change the date of auction to accommodate more developers which impacts redevelopment,” he said. The biggest problem is the premiums charged by municipal corporations. There is a development premium, open area deficiency premium and so on which comes to 20 to 30% of the cost of projects at times which makes the redevelopment projects unviable, he added.
The waiting period is often too long for comfort. Negotiations with many societies go on for an inordinately long time because of expectations of higher prices, changing of goal posts and so on, he said.
“In today’s era of competition, societies are unnecessarily creating price war between developers. If developer B gives better than A, A has to match it. Greed has no limit. In the price war, projects become unviable. You will go back to era of non-delivery, work stoppage and so on,” said Dhaval Ajmera, director at Ajmera Realty & Infrasrtcuture and secretary of CREDAI-MCHI. Ajmera has signed a couple of projects in Mumbai and is executing a few in the city.