Note: This opinionated study was prepared on 26.11.2018 in course of analysis of FSI 2.07 proposal, once the Mega Proposal utilizing FSI 4/5 was abandoned because of non-cooperation from govt. of Maharashtra in the matter of Premium Waiver. FSI 4/5 or FSI 2.07 both were essentially BUA (Built Up Area) sale model under umbrella concept of PPP execution mode.
Once the govt. of Maharashtra declined waiver of premium on FSI (over and above the basic zonal 1.33), the department stumbled on to a dead end. With this in view, the NBCC, the then Project Implementation Consultant devised a new formulation wherein, only free zonal FSI was to be utilized for making the CBIC portion ( in the mega plan, spaces for IT, ED were also factored) and avoid entering the paid FSI arena.
The aim of this article is to show the latter BUA proposal of FSI 2.07 in poor light and to encourage either FSI auction model OR to seek govt. funding. It may be further noted that as the NDA regime was more into promoting PPP executions and not the govt funding/deposit work model, so the team’s study centred around exploring next PPP model when the one is tested unviable.
Govt. funded executions are safest but if PPP is the policy imperative, the models of PPP have to be examined in the light of current market economics. Vide a report dated 11.08.2018, I have already warned the authorities against BUA model using FSI 5/4 and through the instant article, I am again seriously discounting another BUA model using FSI 2.07, although for different set of reasons. I want the authorities to either go after FSI auction model with no cost to govt. or to seek full budget from the centre.
If you through my studies below, you will discover as to why I advocate FSI Auction or Govt funding over all other propositions.
I Support Either FSI Auction Model or Govt. Funding Model Instead, the BUA sale (Flat Sale) Model
The perception that makes the project model of 1/3rd BUA sale seemingly lucrative is the scope it offers land owner to use potential FSI available after construction of sale-able units, flats or office office. Because, the rights of buyers is subjected to the limit of only purchased BUA through a standard sale deed, the land owner remains eligible for using any FSI appurtenant to the land. This is the case when either the land owner has underutilized the FSI or gets some FSI through certain changes in development regulations of the state. Except this belief of future expansion there is no strong argument in favour of this model.
[Ground reality however, is that after 99 years lease sale OR freehold sale the land owners have rarely been able to use the FSI in their favour either, because of litigations posed by RWA or their voluntary give ups. Meaning, the title ultimately goes to the buyers only]
An alternate to the second self-sustainable model viz. scheme FSI2.07, could be the FSI auction model, wherein, the land owner sells sufficient FSI, to fund the construction cost of his part of project. The process enables to get upfront money from corporate buyers and the project of the land owner takes off right away. However, to understand things at minute level we need to examine if this model is actually executable. Needless to say, execution boils down to the economical & commercial viability of the model.
Down the line we try understanding why viability of the 1/3rd BUA sale model raises doubts and why FSI Auction model can be a way to go with.
[A] Booking of Flat and Proceeds Scenario
Booking of the properties is crux of success of any self-sustainable model that envisages bringing in funding by Sale of constructed Units. So, as far as our self sustainable model of 1/3rd BUA sale is concerned, we will be analyzing the case under different sub heads below starting from the prevailing buying scenario to the alternate way outs.
1. Poor Dispensable Money Scenario, Flooded Supply and Cost Rise Owing New Par Index
Net worth of individuals with high net worth has gone almost doubling (or even more) after Demonetization for reasons unknown to a layman. Although, no institutionalized economic report is available to this effect but statistics from various sources is indicative of the very fact. Concentration of -wealth skews more towards individuals already coming in the category of high-end worth.
For Example, net worth of Mukesh Ambani stood at $21 Billion as of Nov. 2016, Check it here! However, the net worth of Mukesh stands at $ 46.4 Billion as of Nov. 2018 Check it here!
The middle class appears to have fared poor on savings and dispensable money post demonetization. In fact, saving itself didn’t remain that rewarding because of cut on interest on saving (Even the retirees are getting receding money on their deposits). Property bookings have largely been facilitated by savings of households. Savings have although been discouraged by many other things coming into play but inflation on everyday consumables has also big effect (The statistics show it another way round though, obvious reason is changing of base price index ). Combined effect of this all is that as on date only 5% of City population can afford to buy a home outright or with a home loan. Consequently, there exists flooded supply of unsold flats further leading to developers having gone cash strapped. Press reader explains it well here!
In the earlier scenario of Real Estate, almost thirty percent of flats used to be booked by the investors for making profit in due course. This pillar for the current Real Estate seems to struggle for selling out their old purchases and unable to gain the proceeds for investing into new projects.
Hindustan Times report of March 2018 attributes the unsold flats to reach 1.09 lakhs to dual aspects. The Research firm blames un-affordability, while builders say it’s note ban, GST, RERA effect. Lets Check it Out here!
Mumbai Mirror had reported in March 2017 that Mumbai had been witnessing biggest ever slump in the reality sector. The market rates of property in the city including Dadar and Colaba had been reported far below the Ready Reckoner rates. Let’s check this Mumbai Mirror Report.
Afternoon Voice quotes Maha RERA Chairperson as saying that there is a huge mismatch between supply and demand which has resulted into piling up inventories of unsold flats in the city. Such unsold flats number up to be 4.8 lakhs. Lets see this report by Afternoon Voice!
First post reports that maximum unsold inventory lies in the 1 BHK / 2BHK segment (of course, meant for middle Income group folks) and unsold homes in Mumbai are recorded by 3.5 lakhs. Lets check this report by first post.
The affordable housing provider agency of Maharashtra State Govt., MHADA reported in October 2018 that the real estate sector is witnessing poor turn out of the buyers and has announced 20%-30% reduction in the sale price to attract buyers. Lets See this Hindustan Times Report!
[edited] Responses on State financing policy for self-redevelopment scheme launched by Mumbai Bank, BMC & MHADA are very encouraging and the benefit is being viewed to cover 10,000 societies in the Mumbai City. As per preliminary work out, the banks will be able to recover their loan even if a flat with eligible sale rate of Rs, 35000/ sqft. sells in the market at a rate of Rs 24000/ sqft. (More on self-redevelopment here!) The estimation by the banks are indicative of the fact that, the traditional builders who aim to sale flats at the standard rates are going to face a steep competition with the sale offered by the redeveloped societies. The re-development scheme offered by state bodies is being seen as fast-catching trend of housing societies underway for redevelopment. Mumbai Mirror puts everything in detail here:
[edited] New Par Index approved on Dec. 7th, 2018 by CPWD western Zone has risen the PAR index from earlier 132 to 145. Meaning, the new projects will cost more in the ratio 0f 145/132 i,e roughly by 9-10% minimum AND it is highly likely that the demand facing slump, new bookings will be hit severely. Willingness to book the properties at hiked price may take long to catch-up.
A step ahead the Live Mint reports real Estate to be died in 2018 and anticipates that that lull and slump is going to stay. In fact, real estate used to be rewarding for both house buyers and investors as well but since 2013 it started dwindling and hit the rock bottom by the end of 2016. The drastic changes could be attributed to Demo and RERA into play Lets see this report.
2. Booking Scenario Specific to Our Case
As per sale rate estimation in feasibility report dtd 5.11.18 a typical 2 BHK flat under Wadala Project is going to cost buyer around (74.43 x 10.764) x 23,000/ = 1.84cr. If taxes worked out, it roughly comes to 2.28 Cr. (including 18% GST + 6% Stamp Duty).
Considering the same sale rate 3BHK flat would come for (119×10.764) x 23,000/= 2.94 Cr. With taxes in picture, it roughly comes to 3.65 cr (including 18% GST + 6% Stamp Duty).
Both the sale price scenario are on lower side, some of the 3 BHK having larger areas which would cost more than Rs. 3.65 cr.
An important aspect of these transaction would be that all the money has to transacted with complete transparency. No scope of cash dealing for buyers is there in our case contrary to the case with other sellers.
Question is how many buyers are there in the market to afford such high rates when supply market is already flooded in the vicinity of our project because of Ajmera & Lodha, who are already offering buyers luring discounts in the range of 20%-30% as per non-official sources.
Also, our projects has only slim likelihoods of causing traction for buyers of high end worth. Most probable reason, would be the prevailing pollution impact of chemical refineries in surroundings.
Our project has more proximity with the Ajmera and Lodha projects in terms of sale pricing, location and pollution factor. So, the likely scenario of the bookings with us is aptly comparable with that of Ajmera and Lodha projects, which obviously is not good.
Marketing strategy of NBCC is also not very clear especially, what percentage of sale they are going to offer to brokers [It may be borne in mind that Booking of Real State is largely dependent of the aggressive sale methodology adopted by the agents and brokers]. But in any case, offering hefty commission to marketing agents/brokers like other developers do, will not be easy for NBCC as the entire Cash flow will be essentially having total transparency in terms of layered monitoring of the funds from bottom to the top of authorities.
3. Proceeds Can Come Either by Sale of FSI or Built Up Area/flats
In a self sustainable model of projects like ours, where no external funding is going to be infused into, proceeds can be generated either by selling enough FSI or by selling the constructed units.
In the month of August, 2018, the Enclave team along with PPP expert had a meeting with Dy Metropolitan Commissioner, MMRDA at the initiative of PPP Expert. The DMC explained that almost all their project have been based on FSI Auction Model, because the model provides with upfront fund and you are saved from lot of complexities arising out of built up area sale modalities.
The meeting was very elaborate wherein, as many as 6 self sustainable models were discussed including BUA Sale mode and FSI sale models as popular ones. In a nutshell, we were made to understood that, if the BUA sale model was that easy why the infra specialist agency MMRDA was not undertaking their projects through BUA sale. And further, that BUA sale model essentially required us working in the shoe of Developers and Builders. Govt, officials should better avoid jumping in the arena of Developers and builders for more obvious complexities on account of RERA coming into picture.
Need to Revisit the model was also brought to the attention of Departmental authorities [Check Report Here : Aug 11, 2018] but somehow its stood ignored. Most likely because, they sensed that the then RS, may not like abrupt changing in the funding model.
[B] Sale Constructions Fall within Strict Imperatives of RERA and May Prove Highly Time Consuming
RERA on the one hand has empowered the common buyers with a handy tool to get their consumer rights protected and grievances addressed, on the other hand it has almost caused crippling effect on the developers. (Details of RERA effect is explained here)
Because of strict norms of RERA, moving funds from one project to another has been the toughest hurdle for builders and project owners that has literally stalled the growth of Real Estate.
Our project model also comprises two sub-projects viz. residential towers for sale in the open market for odd consumers AND Govt offices & residences both to be built by the proceeds generated from the sale. Clearly, the saleable constructions have to be registered under RERA and all the imperatives under RERA will be obligatory to the Customs Department by virtue of their being project owner.
Ensuring timely possession of the flats to the home buyers will be responsibility of Customs Department, failing which the project owner (Customs) is liable for paying penalty amount/Compensation to the buyers. NBCC can shrug off, in difficult times because of their being in the role of Project Consultant only. Important to note, that they are not owners and hence RERA concerns may not be taken up seriously by them. Primary aim of a project consultants like NBCC appears to make a certain % of PMC fee on every stage of construction completed.
In our case, it is intended to move the proceeds obtained from sale-able residence to govt use portion for them being constructed. This is gonna big hurdle, as in the case of lesser booking ( which in all likelihoods going to happen) no diversion of funds can be done for other purpose in compliance with RERA Provisions. The norms of RERA seek to ensure enough of the funds to be blocked for completion of Sale buildings on priority. Hence for example, at any stage of time if completion of sale buildings is going to cost Rs. 700 Cr. and we are having only Rs. 699 Cr. in escrow , we will not be able to divert any amount of funds for construction of our govt. portion. Worse, we will be stressed to gather additional funds for SALE buildings in these circumstances.
To make the compliance part little light weight, NBCC may go for constructing the three saleable towers in phases by registering ONE tower at a time with MahaRERA. This gives an impression that at least 6 (2×3) years will be taken to complete the Saleable part. During this entire duration we will have many break-in periods wherein only few number of occasions would enable us to transfer the excess of funds for construction of Govt. portion. The only occasions when we will be able to transfer every pie of inflow would be when all three Saleable towers would have attained completion qualifying for OC (Occupation Certificate).
The situation gives another impression that there will be an intermittent inflow of funds for Govt. use portions implying an unduly long course of completion of the Govt. Portion. The govt. part of project may take at least 4 years time from the point of time of saleable part having been completed. Meaning, if the saleable part starts today, the govt. portion would take 10 years or more from now.
Whereas, this needs a deeper clarity from NBCC with realistic figures of time duration as to how constructing the sale towers in phases would help us simultaneous construction of Govt. portion but it also feels insisting NBCC to start construction of both the parts together, may not be in the interest of project completion. Lest we get stuck up in the process and both sides of the project comes to a halt. The scenario looks pretty scary for possibility of responsibility fixing, should audit makes way into the matter.
[C] Additional Issues Likely to Come up With FSI 2.07
1. Apprehensions of Loosing Land
Although, apprehensions may prove unfounded eventually, the Current FSI2.07 can lead us loosing more of land to buyers or RWA formed in due course. Let us understand why?
Subdivision of the saleable portion (that encompasses three residential towers and associated amenity) is not possible. This is because while applying to MCGM for commencement, the entire plot of 12.784 acres will have to be shown in the map as undivided dedicated land for the sale buildings & amenities for, we will be using entire zonal FSI (FSI for Zone 12.784 acres) for construction of three sale towers. Hence accordingly, MCGM would only issue Occupation Certificate (OC) in terms of original layout Map used for seeking approval of commencement.
Although, the future development rights would be secured to remain with Customs through the sale deeds of sale-able flats, but the apprehension of litigation over the open space may remain a worry for the time to come. This is because any alteration or sub zoning of the 12.784 acres, including divider boundary wall after OC is an understood violation.
Legally however, this 12.784 acres will stand as an undivided common space for existing sale towers and future expansions to come up. And accordingly, the already built up amenities shall be shared by all the residents existing and the future residents who would come up for living in the flats built later within 12.784 acres expanse. For this to happen on expected lines however, authorities should be comfortable ingesting the idea.
Earlier, when we were planning to construct the large project using full potential, lesser amount of land was wasted towards sale buildings. The open space under current scheme of project were supposed to be occupied by more sale towers and offices of IT & ED. In the present scenario when we are planning the construction employing under potential FSI (only basic + setback benefit = 2.07 ) we are uselessly leaving much more open space for sale buildings with apprehensions of future litigation with RWA Society.
2. This Near Realistic Calculation for Cost of Construction of Sale-able part leave us Worrying!
Cost of construction for Sale-able part:
(i)Difference of 2767 cr (total Project Cost)- 1931 Cr.(CBIC Part)** = 836 Cr.
Alternatively,
(ii) 110/328 x [217+834]+ PAR 32%+ Anticipatory Cost Index 6.5%+ Contingency 3%+PMC+Development Cess + Seed Money Interest+ Marketing Fee 1% comes to Rs. 836 Cr.
Fund availability for Construction of saleable part:
Booking Area (SALE) Available = 108000Sqm = 108000 x 10.764 = 11,62,512 Sqft.
Booking anticipated till completion = 40% booking at the rate of Rs 23,000/ sqm = 0.40 X 1162512 X 23,000= Rs. 10,69,51,10,400 = 1070 cr approx
Booking amount realized before OC @ 50% of sale value (max) = 535 Cr.
Booking amount realized before O C @ 75% of sale value (max) = 802 Cr.
(This is based on assumption that you cannot get 100% money from the buyers until you secure OC from local authority)
Obviously, the 535 Cr. doesn’t seem to suffice the construction to cost 836 Cr. and getting 75% or above the sale value from the buyer appears little bit unrealistic. The team senses the model to be unsuccessful. With that said, however this has to be vetted by the economic and financial Expert.
It feels, if the financial expert can guarantee some optimistic picture under the prevalent slump of Real Estate, then only we should go after the current BUA Sale model.
[D] Cost Calculation for CBIC Construction Part Only
(If we could auction 1/3 FSI and constructing only CBIC portion remains our concern)
1. Under FSI2.07 Proposal and DPR thereon, this is the area break up: Govt Residence = 164,000SQM, Govt office 54,000 SQM, Sale Built up Area = 110,000SQM,
2. Consequent ratio are 164: 54:110 = 328
3. Govt Portion: Sale Portion = 218: 110, Residence now: Residence earlier= 164: 274
4. AOS obligation Ratio= 2:3
5. Block Construction for Podium 218 X (218/328) = 144 cr.
6. Block Construction for Residential 834X(164/274) = 499 cr.
7. Block construction for office building= 208 X 1 =208cr.
8. School & Hospital 28 X (2/3) = 19 cr.
9. Site Development 63 X (2/3) = 42 cr.
10. E & M Services 165X (218/328) = 109 Cr.
11. Total (without PAR) = 1021 Cr.
12. Add 32% PAR over Sr. 11 = 326 Cr.
13. Total Basic Construction Cost = 1347 Cr. (A)
14. Add Anticipatory Cot Escalation 6.5% of (A) = 87 Cr.
15. Total after Anticipatory Escalation = 1434 Cr. (B)
16. Add Contingency 3% of (B) = 43 Cr.
17. Total after contingency = 1477 Cr. (C)
18. Add 8% PMC fee on (C) =118cr. (D)
19. Add 18% on PMC on (D)* = 21 Cr.
20. Total after NBCC fee = 1616 Cr.
21. Maintenance for 30 years = 228 Cr.
22. Seed money interest (5%x1347x 12%) = 08Cr.
23. Development Cess payable to State [119x (218/328)] = 79 Cr.
24. Marketing fee to be paid to NBCC = = 00
25. Total Project Cost =1931 Cr.
[E] 1/3rd FSI Sale Exudes Better Clarity for Project Completion
The FSI auction of the enough land, say 1/3rd should bring in at least 1/3rd of Valuation of the land i.e, 1/3rd of 4700 cr. working out to 1566 cr. upfront. This entire money would not be spent all at once. Money could generate at least Rs. 250 cr. in interest over the period of 3 years, the spanning course of duration for the project. This totals to 1810 cr.
The estimated cost for CBIC costs only 1931 cr that includes 228 cr, 3o years of maintenance also. if we can factor maintenance for only 10 years with rest to be taken from govt on expiry of 10 years actual cost works out to (1931-228)+ 1/3rd of 228 = 1703+76= 1779 cr. Say Rs. 1780 cr.
Also, seed money from NBCC will not be a necessity when we sale FSI and generate fund upfront. So, Interest on seed money will be ruled out and this will bring down the cost further to 1780- 08 cr= 1772 Cr.
Moreover, PMC fee rate can convincingly be asked to lower down [from 8% to may be 2% at most] given the fact that in FSI auction scenario, NBCC will have least amount of complexity to deal with. The cost will further go down by Rs. 91cr. resulting in total of 1681 cr.
[F] Yet Another Option Could be Asking for 1681cr. from Centre [Safest Execution Model]
Yes, we need not selling an inch of our land if we can get 1681 cr. from the centre. If not possible to bet 1681 cr in one go, 360cr / year for 5 years could be an option.
Further Clarification: If we want the Office building at Sr. 7 to accomodate the GST needs also apart from Customs & Directorates the area will be almost 3 times of the present area. Accordingly the cost considered at Sr. No. 07 cost will be add up by further 416r. End effect of PAR, GST etc will all not go upwards of 450 cr. Importantly this will include buying some FSI which will cost us more than 150cr.
So,
If we were to construct a fully accommodating CBIC office space (Customs+ Directorates+ GST), 1200 staff quarters (Which I still feel is the most realistic picture of needs) Construction cost will be around 1681+ 450cr.+150 = Rs. 2281cr. which can again be asked for, from centre in an equated pattern, may be : 570 cr for four years. [or 460 cr for 5 years as the case may be] This will not require us selling any land or FSI and still we will be having almost 2.60 FSI roughly in reserve.
(Again if we want CBDT tower also in place, construction cost(that will include buying completely paid FSI will be below 1000 cr roughly. So, CBIC tower+ 1200 staff flat+ CBDT tower = 3300cr approx. and still we will be having almost 1.75 FSI roughly in reserve)
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Disclaimer: 1.The hypotheses are purely individual, created by Sh. Mahendra Yadav, Supdt. /Enclave Cell and the team. These are only opinionated and do not guarantee of being flaw- proof. Authenticity needs to be vetted by designated expert of the subject.
2. The FSI sale rate is based on the assumption when land has potential of only 1.33, if 4/5 FSI can also be accounted (to be confirmed from experts), the proceeds from FSI sale would go higher.