Impact of Redevelopment of Old Buildings on Housing Prices and Rentals in Mumbai

Impact of Redevelopment on Housing Prices and Rentals in Mumbai

Despite an increase in supply post COVID-19, realtors in Mumbai continue to find it lucrative to launch redevelopment projects as both prices and rents have surged.

Mumbai’s changing skyline suggests the city is rapidly evolving to resemble New York. Thanks to redevelopment, new skyscrapers are continually emerging. Additionally, several listed developers are increasingly undertaking the redevelopment of old buildings despite the significant increase in housing supply post-COVID-19.

According to real estate experts, this trend has resulted in capital values of apartments rising by 40-50% following the redevelopment of old buildings, while rents have also significantly increased over the past three years.

Listed Developers Undertaking Redevelopment Projects in Mumbai

On June 10, two listed developers, Raymond Realty, the real estate arm of Raymond Group, and Man Infra Construction Limited (MICL) Group, announced the acquisition of two old buildings in the Bandra East area of Mumbai.

Raymond Realty revealed that it has been selected to redevelop a housing project in Bandra East with an estimated revenue potential of over ₹2,000 crore. Previously, the company signed three joint development agreements for projects in Mahim, Sion, and Bandra, with an estimated development value exceeding ₹5000 crore.

MICL also announced the acquisition of a redevelopment project in the Kalanagar area of Bandra East. The company stated that the project will be an ultra-luxury one with the potential for constructing 5 lakh sq ft. The project is located close to the Bandra Kurla Complex (BKC), India's most expensive commercial business district.

Last month, Oberoi Realty announced its plan to redevelop seven old buildings comprising 504 flats in the Adarsh Nagar area of Worli, Mumbai. In return, Oberoi Realty will gain 6.24 lakh sq ft RERA carpet area to be sold in the open market.

In April 2024, Bengaluru-based real estate developer Puravankara Ltd was appointed as the developer for Mumbai’s Pali Hill redevelopment project. The project has a cumulative estimated development potential of 4.10 lakh sq ft carpet area, with over 2.15 lakh sq ft available for sale, and a potential Gross Development Value (GDV) of over ₹2,000 crore, according to the company.

Why are developers rushing to grab the redevelopment pie in Mumbai?

Mumbai is a land-starved city, and the only way realtors can develop new projects is by undertaking redevelopment.

Developers with Redevelopment Projects

In Mumbai, several prominent real estate developers such as Rustomjee Group, Raymond Realty, MICL, Oberoi Realty, Ajmera Realty, Bengaluru-based Prestige Group, Puravankara, Kolte Patil Developers have redevelopment projects in their portfolio.

Boman Irani, chairman and managing director of Rustomjee Developers, stated in July 2023 that the company's exposure to redevelopment projects was 11% at the time of going in for its IPO in November 2022, and that the share may go up to 30% going forward.

During the Q4FY24 earnings call, Irani informed investors that his company had added 15 new developments (projects) in the last two financial years, out of which 12 are redevelopment projects.

Impact of Redevelopment on Capital Values and Rentals in Mumbai

Rental Values and Yields

According to developers and consultants, the rental values and rental yields of projects have increased in Mumbai with several old buildings undergoing redevelopment.

"With demand for rental accommodation far exceeding supply, rentals have gone up in the city. This is because if a housing society with 100 flats goes for redevelopment, all 100 homeowners will not be able to get a house on rent in Mulund itself. At least 20% may have to look for options outside of Mulund as they do not have much choice," said Vishal Thakkar, partner at Mumbai-based real estate firm Prem Group.

"In terms of capital values, if one were to consider the cost of an apartment to be around ₹1 crore before redevelopment, after redevelopment the same apartment may cost ₹1.40 to 1.60 crore with more space. One may say that this redevelopment-induced demand and supply may not be sustainable for the long term but the fact remains that the base price of apartments, be it rentals or outright sale, is bound to go up," said Thakkar.

Rental Yield Growth

Mumbai had the country’s second-highest rental yield of 4.15% in Q1 2024 among the top 11 cities as against 3.5% back in 2019 – a 19% growth, according to ANAROCK, a real estate consultancy firm. According to experts, this increase in rental yields post Covid-19 times is largely on account of redevelopment-induced demand for homes.

In Mumbai, Chembur and Mulund witnessed 4% growth in rentals. In Chembur, the average rental rates in Q1 2024 stood at approximately ₹62,500 per month as against ₹60,000 per month back in Q4 2023, according to ANAROCK.

"Mumbai faces a shortage of land for greenfield development due to rising population and rapid urbanization. Thus, the imbalance in demand-supply within a dense micro market creates a rental inflationary scenario," said Niranjan Hiranandani, chairman of Hiranandani Group.

"This flurry of redevelopment projects will push up the rental indexes until they are completed. Also, the back-to-work phenomenon has prompted migrant workers to return to cities, adding further pressure to the demand curve. This has resulted in a nearly 15% increase in the rental price index, which is expected to continue. All these factors will sustain redevelopment-led rental market buoyancy," Hiranandani added.