the possible repercussions of the spike in TDR prices

VIBHA SINGH analyses the possible repercussions of the spike in TDR prices, especially for the redevelopment segment

    The real estate market in Mumbai has been going through ups and downs since the past five years. However, the segment received a major jolt due to the recent spike in transfer of development right (TDR), a move which has been received by the suburban developers with great caution and even disappointment. TDR plays an important role, at least in the suburbs of Mumbai. Ram Raheja, director and head-design and architecture, S Raheja, says, "TDR is an important component for builders redeveloping suburban properties because it doubles the builtup area over and above the usual floor space index (FSI) permitted on the plot. Builders wanting to buy it from the market are now finding it increasingly unaffordable." 
    For long, the price base of TDR was in the range of Rs 2,250-2,500 per sq ft but suddenly, it has jumped to Rs 4,000 per sq ft. According to experts, there was effectively an increase every month. Shubhankar Mitra, head-strategic consulting (west), Jones Lang LaSalle India, informs, "The sudden rise in the TDR price from Rs 2,000 to Rs 4,000 per sq ft has caught the market unawares, despite the fact that a rise was likely, as not much TDR generation was taking place. TDR generation mostly comes via slum redevelopment or road widening projects. Effectively, TDR prices have now doubled; such a steep rise was not expected." 
    The TDR policy was launched in 1991 to decongest the island city. Owners whose plots were marked for spaces like playgrounds, etc., or whose land was needed for road-widening, could surrender it and get an equal amount of space in the suburbs. In the suburbs, TDR is generated when the developer/owner surrenders his land to the government and agrees to re-house slum dwellers or project-affected persons free of cost. In turn, he is issued a TDR certificate that gives him additional construction rights in the suburbs but only to the north of the plot he has surrendered. For instance, if a slum is redeveloped in a nonprime area like Mahul, the builder can utilise TDR in an upmarket area like Santacruz (west), which falls north of Mahul on the map. According to industry sources, developers have reaped a bounty ever since the concept of slum TDR was introduced by the state government in 1997. They have gone on a construction spree, especially in the congested western suburbs between Bandra and Goregaon. Rajesh Vardhan, MD, Vardhman Group, opines, "This sudden rise will hamper redevelopment projects in the suburbs, where the developers have already been appointed by various societies for redevelopment at older rates. The major reason for this impediment is the levy of open space deficiency by the BMC, which has been increased to 100 per cent of the premium as compared to 10 per cent of the premium earlier levied." 
    Mitra agrees to this point and explains that "Since the base FSI in the suburbs is only 1, it is a practice for developers to load about 60 per cent TDR in the project in order to take the FSI up to 2. Thus, the increase in TDR cost will also hike project costs. At present, when sales are slack and the developers are finding it difficult to sustain prices, the additional cost is going to squeeze margins even further." According to experts, the real estate sector is a critical one for any economy. It is the second largest employment generating sector after agriculture, and contributes about 5-6 per cent 
to India's GDP. Therefore, a rise in the TDR would make project costs higher, which in turn, would eventually lead to homes costing more. Investors will think twice before investing in real estate and the whole cyclical effect will have a negative impact on the economy. Raheja adds, "The new TDR has impacted the builders' community the most as those wanting to buy land from the market, are finding it exorbitant. We can predict that the hike in rates will only discourage redevelopment projects in general, and there would be a hike in apartment prices." 
    Ravi Ahuja, executive director, Cushman & Wakefield India, concurs that "An increase in prices of TDR will have a negative impact on developers as it will reduce profit margins in projects. Hence, these increases would be passed on to buyers, putting additional pressure on them and creating a negative impact on demand." 
    Raheja adds another dimension to this issue as he explains, "Right now, TDR rights are just with a few big firms. These companies can exercise control over the rest of the builders who need to buy land for their projects. This practice can be checked if there is an impartial committee that distributes the land at a fixed price rather than smaller companies being at the mercy of the bigger players. The transparency in the process of acquisition can help in price and quality control." However, Ahuja is quick to point out, "TDR is traded in the open market and prices are arrived upon based on supply-demand dynamics. It would be very difficult to control prices in the open market." He adds that "In principle, a hike in TDR rates will lead to a corresponding hike in prices for future launches. However, owing to the current demand and absorption trends, which are showing a slowdown due to erosion of sentiments on account of high consumer inflation and prices, this upward revision of TDR is expected to dither developers from launching new projects." The Maharashtra Chamber of Housing Industry (MCHI) recently urged the state government to increase its cap from 33 per cent to 67 per cent in order to further loosen the grip of private TDR suppliers. The government's TDR rate, which is based on the ready reckoner rate of an area, is currently available for Rs 1,500-2,500 per sq ft, which is 80-100 per cent cheaper than the market rate. Vardhan says, "Additionally, they should increase the premiumFSI from 0.33 to 0.67, which will make a huge amount available to the state government and BMC for improving Mumbai's infrastructure. They should also bring back the open space deficiency premium to the original level of 10 per cent." Mitra adds that "There has to be more emphasis on TDR generation through SRA 
schemes and other infrastructure projects. The BMC can also consider allowing more premiums FSI to be used as against TDR." 
    Experts caution that if some measures are not taken immediately, a further hike is going to affect the market negatively. "The substantial price hike will result in a slowdown in trading of TDRs for some time as the current residential markets are subdued in many pockets in Mumbai and developers are faced with liquidity issues. Hence, developers looking at launching new projects would be slow in acquiring TDRs at the new prices as they would have to be sure that the project costs and unit prices can absorb the increased costs," concludes Ahuja.