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Cashing in on fear psychosis, builders up TDR rates by 100%

There's bad news for many Mumbaikars whose old buildings are in the process of being redeveloped. About a month ago, the rates of Transfer of Development Rights (TDR) shot through the roof, going from Rs3500 per sq ft to Rs8,000-10,000 per sq ft. This has pinched the margins of property developers, because of which they may hold up or slow down their fresh and redevelopment projects in the city.

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There's bad news for many Mumbaikars whose old buildings are in the process of being redeveloped. About a month ago, the rates of Transfer of Development Rights (TDR) shot through the roof, going from Rs3500 per sq ft to Rs8,000-10,000 per sq ft. This has pinched the margins of property developers, because of which they may hold up or slow down their fresh and redevelopment projects in the city.

The larger and taller the building proposed, the greater the requirement of premium FSI (floor space index) and TDR. To make the building taller than a specific limit (taller than allowed under 1.33 FSI in the city and 1 in the suburbs), the property developer buys some premium FSI from the government and TDR from the open market. Recently, the government started charging more for premium FSI. A few weeks ago, the government sold premium FSI at 30% of the ready reckoner rates of 2008. Now, the rates are calculated as 60% of the current ready reckoner rate.

Following this development, the TDR lobby has increased TDR prices substantially. This increase will eat into the profits of redevelopers, and will hinder the progress of ongoing construction projects, including redevelopment projects.

What is TDR?
TDR is the virtual space. It is generated when a plot is under a reservation, for instance a playground or a hospital or a school, and cannot be built upon. The owner of the reserved plot gets a certificate of TDR against the reserved plot. The owner can sell TDR in the open market for construction on an unencumbered plot. This TDR can be bought by developers to add floors to their projects, thus earning bigger profits.

Why have TDR rates increased now?
The state government's proposed decision to bring uniformity into the TDR policy has also impacted the prices of TDR. As a result, to cash in on demand for TDR, the TDR lobby has increased prices.

What does the property developers' association have to say?
Sunil Mantri, the president of the developers' umbrella body NAREDCO, told dna that the drastic rise in TDR rates will make residential projects unviable. "There are some TDR holders who manipulate the TDR markets. To curb this trend, the state government should not increase the rates of premium FSI. The rates should be kept between Rs1000-3000 per sq ft only. In this way the state government will earn around Rs5000 crore annually," Mantri said.

Will construction and redevelopment activity slow down now?
Mantri added that this escalation in TDR prices means that no developer can afford to buy the TDR. "If the prices continue to shoot up, then 80-90% of the projects will get stuck and most of the badly-affected projects will be redevelopment projects. Several buildings have already been demolished for reconstruction, how will we compensate the owners?" Mantri asked.

How is a leading property developer reacting to this situation?
Boman Irani, chairman at Rustomjee Group told dna that no one can afford to buy TDR at the rate of Rs8000-10,000 per sq ft. "Importantly, the affordable and low-cost housing projects will be adversely impacted. If the TDR prices continue to go haywire, then the state government will not meet its desire of constructing the affordable houses. Government should think twice before bringing in any policy and I hope that they will do the same," Irani said.

How can the TDR beast be tamed?
Pankaj Kapoor, managing director of Liases Foras, the real estate research firm, said that TDR is not at all in a free market if only a few people are in charge of it. "It is more a monopoly than a market. The rise in TDR prices will spoil urban development. Before bringing in any policy, the state government needs to do the assessment and study the impact of the policy. They should also have corrective measures in place. Otherwise, the real estate sector problems will worsen. That is because the rise in TDR prices will cause a rise in the input cost of the projects," said Kapoor.

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