New CRZ norms a boon for real estate companies
Munira Dongre 12 January 2011

The new rules allow slum rehab in the CRZ area, redevelopment of dilapidated structures in this previously no-go area and higher FSI. But benefits could take a while to come in

The new coastal regulation zone (CRZ) norms open up huge development potential for real estate companies in Mumbai. The new rules will impact the sector in three major ways. Slum development which was not permitted in CRZ areas is to be allowed. It will now become possible to redevelop dilapidated, cessed and unsafe buildings within the zone. The new norms also allow a floor space index (FSI) of 2.5 times in the CRZ areas, in line with the rest of Mumbai city. Till now it was only 1.33 times.

The CRZ area, as defined by the environment ministry, is the stretch within 500 metres of the high-tide line on the landward side. Under CRZ 1, the construction of roads, approach roads and missing link roads is allowed on stilts, to ensure that free flow of tidal water is not impacted. Under CRZ 2, building development will now be allowed on the seaward side of the CRZ stretch, with separate provision for slum rehabilitation with FSI in accordance with existing regulations (maximum 2.5 times + TDR) and government stake of 51% in such projects.

As a safeguard against corruption, the Right to Information Act (RTI) will be applicable to all such projects; the schemes of the Slum Rehabilitation Authority (SRA) will be undertaken through companies with a 51% or more government stake; the Ministry of Environment and Forests will have the right to appoint statutory auditors for redevelopment of dilapidated, cessed and unsafe buildings, while projects under the SRA scheme will be audited by the Comptroller and Auditor General (CAG). The government of Maharashtra will also set up a 'high level oversight committee'. The government sees a 51% stake in projects as a positive, but the markets view it as a negative-the players believe this will be a major deterrent for companies as it leaves 'very little room for them' and it will in fact lead to a breeding ground for kickbacks and corruption.

It is believed that as many as 47,000 families will benefit from the new norms and that 146 slum clusters will be developed with the additional FSI. Additionally, an attempt can be made to develop 620 dilapidated, unsafe and cessed structures where about 38,000 families are residing currently. Other beneficiaries may include 38 colonies of fisherfolk, located right from Colaba (in south Mumbai) to Gorai (in Borivali).

To put things in perspective, of the 437 sq km area that is Mumbai city, nearly 202 sq km is under, or is impacted by the CRZ, that is a whopping 46% of the total area, according to a research report from Kotak for its clients, published on Tuesday. The brokerage believes that assuming all the families which can be rehabilitated will be at 300 sq ft per family, with a 2.5 times FSI, there is a potential for real estate development of 89 million sq ft, "which at the current run-rate would be equal to a decade of supply in various micro markets".

Kotak says that if all works out well, "a case can be made for a win-win scenario for both-developers and property buyers. Buyers could benefit from lower residential property prices due to increased supply (led by higher FSI available; while developers could benefit on greater volumes and an internal rate of return (IRR) similar to current redevelopment projects, as long as constant property prices are factored when the bid is submitted to SRA (Slum Rehabilitation Authority)."

Up until now, due to existing prohibitive norms, most SRA projects took place only in north Mumbai-mostly inland. However, the new norms will allow such projects throughout the coastal city.

While all this sounds great on paper, Kotak believes that any meaningful impact will be 3-5 years away. "We are not turning bullish on property developers focusing on rehabilitation projects on the back of this, as we believe any meaningful NAV accretion will be at least three years away, while  project completion could be 5-7 years away and we await progress in government-developer partnerships." Even market watchers believe that it will take at least six months to a year before policy changes are incorporated in the city's development plan for redevelopment to start.

For now, it looks like HDIL, with around 49 million sq ft of developed and ongoing slum rehabilitation projects (largely the Mumbai airport SRA work) is the biggest beneficiary of the new norms, Kotak says. One drawback is that it has very little presence in south Mumbai.

The slum problem in Mumbai is huge. According to some estimates, the city has a 60% slum area, where unhygienic conditions and the lack of basic amenities causes epidemics (malaria, dengue, even cholera) all the year round. Some say that around 50% of Mumbai's 14 million people live in slums.

(This article is based on secondary research. The report is for information only. None of the stock information, data and company information presented herein constitutes a recommendation or solicitation of any offer to buy or sell any securities. Investors must do their own research and due diligence before acting on any security. Some of the opinions expressed in this article are the author's own and may not necessarily represent those of Moneylife.)

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