With a large number of flat owners in Nagpur looking for the redevelopment of their flat schemes, confusion about the changing rules also prevails. Either the rules are not properly understood by the people or the rules have not been explained properly. A look into the scenario of the redevelopment of old buildings in Nagpur helps in understanding the pros and cons.
Many factors have had a combined effect on the redevelopment of old flat schemes in Nagpur. Here is an effort to understand them.
1. No Supply and No Demand from 2016 to 2022 due to Demonetisation and Covid Pandemic: Traditionally, Real estate has been a major sector for cash transactions, and this was more so in high-value areas of the city. However, as an effect of
‘Demonetisation’ in 2016, cash transactions suddenly stopped and buyers of high-value properties nationwide stayed away from the market for the next few years. Then in 2020, the Covid pandemic struck the nation and it had a devastating effect on all businesses, especially the real estate industry. The pandemic subsided in the latter half of 2021, but it took another year for its effects to wear off. Both these events had an adverse effect on the real estate business. New projects did not come up during this six-year period from 2016 to 2022. So there was no supply of good properties and there was no demand for them either, due to the combined effect of demonetisation and the Covid pandemic. This was a very difficult period for the real estate industry.
2. Emergence of the Real Estate Industry after the gloomy period of six years: It was only in the latter half of 2021, after the pandemic subsided that builders could start negotiations for redevelopment with the flat owners. However, a redevelopment project by its very nature takes a long time to materialise. In cases where a builder buys an open plot of land, he can start
construction immediately. However, in a redevelopment project, it is very difficult to obtain the consent of all flat owners quickly. So, a much longer time is needed for a redevelopment project to materialise which stretches from many months to years. So, only a few negotiations started in 2021 could reach a successful conclusion by the end of 2022. As a result in 2023, we can see many new projects being launched. This has increased the supply of good properties in the market.
3. Reasons behind the sudden growth of redevelopment projects: Unified DCR – In December 2020, Maharashtra Govt brought a new law “Unified DCR” (Unified Development Control And Promotion Regulations Act) for the first time. Earlier, every city in the state had its own local laws governing the construction of housing projects. In contrast, “Unified DCR” is applicable to whole of Maharashtra State except Mumbai city. Many new and novel provisions are incorporated in this “Unified DCR” which facilitates the construction of housing projects in a uniform and organised manner. There are some incentives given in this law, especially for redevelopment projects. Therefore, this “Unified DCR” gave a much-needed boost to the real estate industry in the state.
Although the law came into force in December 2020, it could not help builders immediately because soon after that, the second wave of Covid pandemic struck the nation very severely. Only after the second wave subsided in the latter half of 2021, the builders could start negotiations for redevelopment projects, and only some of those projects materialised by end of 2022. So, the year 2023 is seeing handsome growth in the number of new projects.
Maha RERA – Another factor helping the housing industry is Maha RERA Act. This act gives unprecedented security to flat purchasers as well as to the original owners in a redevelopment project. There are several strict regulations that force builders to strictly follow the agreement of
development and the sanctioned plan. Even the money received from purchasers is kept safe from unscrupulous elements in the field. This has helped create an environment of trust where purchasers are assured and the original owners too can go ahead with their decision of redevelopment without undue fear. Availability of Finance – The investors who usually invest in real estate projects had no projects to invest in, during the period from 2016 to 2022. Their money was lying idle without the proper returns that a real estate project could offer them.
When the industry bounced back in 2022, these investors are now out looking for good projects to invest in. Also, due to the growth in demand for housing, some new investors are now eyeing real estate as a good opportunity for investment. Consequently, finance availability for housing projects has increased significantly.
4. Backlog of demand created in last six years: Presently, along with the launching of new projects, the builders are seeing a spurt in demand for good properties. So both the supply and demand have picked up resulting in good prospects for the real estate industry.
Most of this current demand is the result of a lack of action for the six-year period from 2016 to 2022. Those six years had created a backlog of demand for real estate. This backlog of demand has now entered the market and properties are fetching good value. How long this increased demand will last is the most important question.
5. Mechanics of demand for real estate in Nagpur:
As compared to Bengaluru and Pune, the demand for properties in Nagpur follows a different pattern.
Due to the IT industry concentrated in Bangalore and Pune, many youngsters migrate to these cities from all over India and within a couple of years they buy flats there. Every year, more youngsters keep migrating there and so the demand for housing remains always high in these cities.
Nagpur has emerged as a major education hub in Central India. However, the students who come to study here do not buy properties. They live in hostels or rented accommodations instead. Nagpur has no major industry which can provide a large number of white-collar jobs, which would create a permanent demand for housing. How long this increased demand for housing will last in Nagpur? Most of the real estate players believe that the backlog of demand created in the last six years in Nagpur will get absorbed by the multitude of projects coming up in the next couple of years. Thereafter, the city may go back to the phase of steady and low demand as it has always seen in the last several decades.
6. How and when a redevelopment project was born: Many factors affect the start of a redevelopment project. The foremost among them is the consent of all flat owners in a building. The developers have observed that obtaining the consent of all owners is the most difficult task in a redevelopment project. Almost everywhere a builder starts negotiations, he usually gets a majority of members to positively appreciate the proposal. However, a few flat owners hold back their consent due to various reasons.
Relations among the flat owners in a building and the history of previous disputes among them are seen to be a common cause behind the failure to obtain the consent of all.
Members in an old building need to discuss these issues among themselves and try to resolve the differences before they approach any builder for redevelopment. Everybody should understand that if redevelopment happens, then it will be beneficial to all members. Some petty disputes can be set aside until the redevelopment is over.
Another factor is the tendency to wait indefinitely for the so-called “best offer”. Yet another reason is a lack of knowledge about the various provisions of the Unified DCR Act, MahaRERA Act etc. Without access to authentic information about regulations, some flat owners choose to believe the gossip they hear from other sources. The best way here would be to get help from a qualified person and judge the potential for redevelopment and then to judge various offers upon their merit and reputation of the builder and his past performance. Waiting for the “best offer” or going for the “highest offer” can be risky at times.
7. How long to wait for taking a decision to redevelop your building?: Presently there is good demand and a good supply of properties and the picture looks rosy. Redevelopment of many old buildings has started already. But a large number of old buildings are still considering the redevelopment option, most of them facing the “lack of 100% consent” issue.
Those who decide early will reap the benefit of the current market conditions. They will get good returns on redevelopment. However, as time passes and a large number of redevelopment projects get launched, a situation may arise when the supply will be more than the demand. And then prices may drop. This means that the benefit to the old flat owners will also start diminishing.
8. How does a builder make the offer for redevelopment?: Like any other business, the real estate business is based upon calculations of cost and income. For any given plot, there is a fixed area that can be built in a new building. The regulations of Unified DCR law govern how much area can be built on a plot of land, depending upon its dimensions, size, location, etc. Let us say the total buildable area on a plot is “A” sqft. The builder would calculate the total cost of the project and add his own profit margin. If the sum of project cost plus profit is “X” Rs.and the prevailing rate of sale of flats is “Y” Rs. per sqft, then the builder needs to sell at least X/Y sqft of the new building to cover the project cost and his margin. Let us say the area thus calculated
which needs to be sold is “B” sqft. Then the builder can offer the existing owners a total area of “A –B”. As more and more redevelopment projects get started, the selling rate will come down due to more supply and limited demand. Then the builder will need to sell more area to recover the project cost and consequently, the existing owner’s share of the area will be reduced. Therefore, owners of those buildings who take too much time to decide about redevelopment will find that the builders are not offering as much in return as they were offering earlier.
9. Regulations about area allowed to be built: As per the new law UDCPR 2020, Nagpur city has two categories of plots. Those plots which are within a distance of 500 meters from Metro fall in NMRC (Nagpur Metro Rail Corridor). Rules are different for plots in NMRC and those plots which are located beyond 500 meters from Metro. Base FSI of 1.1 (110% of plot area) is available for all plots and it is free to use. All other additional areas like TDR, TOD, Paid FSI and Ancillary Area have to be purchased. Max FSI is total FSI that is allowed to be built on a plot and it is the sum of Base FSI plus TOD, TDR and Paid FSI as applicable. In NMRC – the allowed Max FSI is determined by the size of plot and width of the adjoining road. Max FSI is the sum of Base FSI and “TOD” (Transit Oriented Development Rights) which is to be purchased from METRO. Plots with an area less than 1000 sqm have Max FSI of 2.0 irrespective of road width. Plots above 1000 sqm have Max FSI of 3.0 if they are on 9m wide road. Plots with area from 1000 sqm to 2000 sqm have Max FSI of 3.5 if road width is 12 m wide or more. Plots with the area above 2000 sqm have Max FSI of 4.0 if road width is 15 m wide or more; Max FSI of 3.5 if the road width is 12m to 15 m and Max FSI of 3.0 if road width is between 9 m and 12 m.
Outside NMRC (beyond 500m from Metro): Here, the Max FSI depends purely on road width
irrespective of plot size. Max FSI is comprised of Base FSI, Paid FSI and TDR. Base FSI (which is free of cost) is 1.1 for all plots. Paid FSI 0.5 is available for all plots on all roads. And TDR allowed depends upon road width.
Road width 9 m – TDR 0.4
Road width 12 m – TDR 0.65
Road width 15 m – TDR 0.9
Road width 24 m – TDR 1.15
Road width 30 m – TDR 1.40
After calculating the allowed Max FSI on a given plot, then additional area called “Ancillary Area” can be availed on payment. Ancillary Area is allowed at 60% of Max FSI for residential use and 80% of Max FSI for commercial use.
Sum total of Max FSI and Ancillary Area is called “P-line Area”. It includes carpet area of rooms,
walls, balconies, terrace, lobby, lift and staircase. It does not include parking and other amenities like a recreation hall, lift rooms, stair towers etc.
10. Offer in terms of percentage increase: Most of the old buildings considered for redevelopment now were built about 30-40 years ago. The rules prevailing at that time were simple. A plot had FSI of 1.0 if the plot area was less than 1000 sqm and an FSI of 1.25 if it was above 1000 sqm. The total “Built-up Area” of a building could not be more than this FSI. In addition to this, balconies were allowed at 20% of built-up area. So the total of existing built-up plus balconies was “1.2 x plot area” for plots up to 1000 sqm size, and it was “1.5 x plot area” if the plot was 1000 sqm or above.
Now the new “P-line Area” is comparable to the old “built-up plus balcony” area. If the “built-up plus balcony” area of an old flat is 1000 sqft, and a builder is offering 25% increase, then the new flat will have 1250 sqft “P-line area”. Earlier, the shares of members in a flat scheme were determined on the basis of the built-up area of their flats (and the balcony area was not considered). Now the shares are determined on the basis of the P-line Area which includes balconies.
The new flat will also have extra area in form of allotted parking and share in common areas and amenities which are not counted in P-line Area. Thus the total or super area of this flat will be more than 1250 sqft. Usually, these extra areas come to about 35% depending upon the amenities provided.