SOCIETY REDEVELOPMENT UNLOCKING HOUSING STOCK

One of the biggest challenges of the urban Indian cities is housing. One of the ways to address it has been the redevelopment of old housing societies, that can provide safer and modern homes to the existing residents and create additional housing.

Across cities, 30-50 years old housing societies are in dire need of extensive structural repairs. However, either the financial costs are beyond the residents means or the buildings are no longer safe to be restored and have to be demolished. In such cases residents can go for redevelopment which includes demolishing existing old building and reconstructing it by appointing a builder who can construct and handover new flats to the society members free of cost with some additional benefits and make profit by utilizing the balancing plot potential by constructing additional flats and shops as per approval from the respective municipal corporation.

While, on paper the process seems easy, there have been instances, where redevelopment buildings have been abandoned by the developer midway or got stalled due to various reasons like mismanagement of funds, political issues, delayed deliveries, improper planning or change in policies.

Nayan Dedhia, Managing Director, Toughcons Nirman Pvt Ltd, a Project Management Consultancy for Services in Redevelopment, Self-Redevelopment & Cluster Redevelopment gives an overview. “Many build- ings in Mumbai are decades old and no longer meet safety standards, posing significant risks to residents. Redevelopment allows for better utilization of space, accommodating more residents and enhancing living standards. Redevelopment projects are essential for modernizing the cityscape, providing better amenities, and improving the overall quality of life. However regulatory measures should be eased for the process of redevelopment. For instance, simplifying the approval process for redevelopment projects to reduce delays, establishing clear, consistent guidelines for developers and housing societies to follow, providing tax benefits or subsidies and reduced GST or allowing input tax credit will encourage redevelopment activities. The challenges facing housing redevelopment range from achieving unanimous consent among society members and ensuring the project is financially feasible for all stakeholders to managing the complex legal frame- work surrounding the redevelopment. Therefore, the important factors developers should consider while taking up a redevelopment projects are understanding and addressing the requirements and concerns of the existing residents, thoroughly assessing and mitigating potential risks associated with the project, ensuring all agreements are clear, transparent, and legally sound, establishing robust mechanisms for dispute resolution and adhering to all legal and regulatory requirements promptly to avoid delays.”

Tapping Redevelopment Opportunities

The residential societies approach developers as redevelopment is a complex process, requiring multiple approvals, regulatory compliances and know-how of construction process, on the other end for developers, redevelopment offers an ideal opportunity to unlock premium land parcels. In fact, the building owners are reposing their faith in large and listed developers to take up redevelopment.

While, there is scarcity of land in metro cities, especially in and around city centers, there are many numbers of old dilapidated buildings on prime land. Furthermore, state governments too are enabling redevelopment through supportive policies. No wonder, what was once a realm dominated by smaller local builders, is now seeing large developers exploring this segment. The new trend is also bringing more structured processes and transparency benefitting the land owners as well as the developers.

According to the developers, what makes redevelopment a lucrative investment is the rising demand from the city dwellers to upgrade from their existing old buildings to modern complexes with amenities, but in the same location. Hence, prime locations are becoming a hub for new redevelopment that are getting transformed into luxury homes destinations.

Redevelopment Process

The process begins with the consent from at least two-thirds of the members of the society to engage a developer for undertaking redevelopment. The docu- ments such as society’s no-objection certificate from the local municipal corporation, building layout plan and feasibility report are reviewed by the authorities, and once approved, a letter of intent is issued. The society then enters into an agreement with the developer outlining the terms and conditions of the project. This agreement will include the timeline for completion, the cost of the project, and the amenities to be provided. The biggest challenges that redevelopment projects face from resident’s end are the obtaining of consent of two-thirds of the society members and submitting the right documents as many old societies may have lost or misplaced the essential documents; the devel- oper’s challenges include arranging finance for the high compensation to be provided to each member of the society, construction costs and the tax liabilities.

“Major laws required to be kept in mind include the Transfer of Property Act, 1882, Registration Act, 1908, Indian Contract Act, 1872, CRZ laws, State laws like Maharashtra Ownership Flats (Regulation of Promotion of Construction, Sale, Management and Transfer) Act, 1963, Maharashtra Co-operative Housing Societies Act, 1960, stamp duty laws, Development Control Rules, Environmental Law, Tree Cutting Laws, Municipal Laws, Slum Redevelopment Scheme etc. If there are serious legal irregularities in the process of redevelopment and when they are noticed halfway, they can jeopardize the redevelopment and the consequences can be severe as what the law does not permit cannot be done either by the Builder or by the Society,” cautions Dilip Shah, Senior Counselor and Analyst for Redevelopment of Housing Societies and Society Laws.

Advocate Vinod Sampat had advised, “As per the stipulated rules and regulations, for a society to opt for redevelopment, its conveyance has to be completed first. To complete conveyance, society needs to have the property card in the name of the rightful legal entity, and the property owner should join as a ‘confirming party’ as per the clauses in the model agreement.”

Pain Of GST

The major roadblock redevelopment projects face is the triple whammy of GST. The first levy at 18% applies on transfer of development rights to the builder (redeveloper), subject to there being a sale of flats post-acquisition of the completion certificate. The builder also incurs GST during the construction phase on the construction materials averaging 18%, for which no input tax credit is available. Lastly, the GST on flats being sold in the open market and the GST incidence at 5% on the new flats transferred to the CHS members, paid by the developer or the member as per the terms & conditions. The catch is that this tax is paid on the market value even as the new flat is in lieu of the earlier one.

Legal experts contend that transfer of development right of an immovable property is akin to a purchase of land, which should not be subjected to GST. Further, when the completion certificate is received, the land is transferred to the new society members.

Boman Irani, president of CREDAI-National recently made a representation to the finance minister. It was stressed that in redevelopment schemes, the GST de- partment is charging GST on the market value of the flats given to existing CHS members free of cost, which is in lieu of their existing flats. This effectively leads to double taxation as the cost of this rehabilitation component is already ingrained in the cost of flats being sold in the open market on which the developers are already collecting GST and discharging their liability.

Financial analysts suggest that a view can be taken that no GST is payable at the time of possession of the new flats by the members, since the free area allotted to members is an expenditure for the developer and not an income and the said expenditure is indirectly loaded into the price finally payable by the new buyers on which tax is already paid.

Self-Redevelopment Model

One of the reasons for considering self-redevelopment is the concern around inadequate compensation and/or delayed deliveries of the redeveloped projects. There have been numerous incidents where established developers abandon or delay the projects or stall the construction midway due to financial constraints or irregularities.

While, self-redevelopment has many advantages from control on project, more carpet area for members to extra amenities and getting profit from sale flats, extra amenities, etc., the downside is the lack of experience and expertise to plan and manage the project and making sure all the members are in agreement for each and every decision.

Encapsulating the dos and don’ts of self-redevelopment, Nayan Dedhia, said, “The advantages of self-redevelopment model for housing societies are greater control over the project, potential cost savings, and tailored outcomes for residents, while the disadvantages are increased financial burden, higher risk exposure, and the necessity for expert management.

Whether self-redevelopment or through a developer, redevelopment is the need of the hour to rejuvenate our cities. The introduction of new Cluster Redevelopment Policy (under which developers get an additional floor space index for redeveloping existing housing societies) has given further boost to these projects and with correct policy incentives, we may see redevelopment as a primary recourse to addressing the housing shortage across Indian cities.

Benefits For Society Members

• More carpet area than what the builder offers
• More compensation than offered by the builder
• Better planning as per the members’ requirements
• Timely completion & better amenities

Limitations For the Society Members

• Lack of decision-making among members may cause delays
• Internal squabbles amongst members could derail the project
• Selection of the qualified and competent professionals
• Arranging funds & navigating the regulatory framework 

Redevelopment Regulations

Some of the key features of the new rules for redevelopment of society in accordance with the changing needs of the urban population include:

• Mandatory consent of at least two-thirds of the society members to be obtained for the redevelopment process.
• The society is entitled to receive a minimum of one hundred and twenty-five percent of the rehabilitation area's prevailing ready reckoner criteria for the project.
• Every member of the society should be compensated with a new home, equivalent to twice the existing carpet area of their flattened property.
• A time-bound completion certificate will be issued to the developer upon successful completion of the project.