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Rationalising charges for conversion of leasehold into freehold properties in Mumbai can unlock huge value

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Drawing attention of the reconstituted Maharashtra government, India Sotheby’s International Realty has said that rationalising charges for conversion of leasehold into freehold properties in Mumbai can spur redevelopment of properties in Mumbai and can also unlock huge asset value.
Rationalising state charges levied for converting leasehold properties in Mumbai into freehold will help in unlocking value of housing, commercial and industrial assets in the city and should be a part of the development agenda that the government has undertaken, India Sotheby’s International Realty (ISIR) has suggested in a white paper titled ‘Why Leasehold Property is shackling Mumbai’s Real Estate Potential’.

The consultant, in its report, has pointed out that the conversion charges to change property rights from leasehold into freehold are as high as 60-70 per cent of the property value. The amount is typically paid by sellers. Required payment of such a high rate to convert them is often deferred by the landowners to the next generation. This stalls development and actually lowers state revenues.

Samir Saran, managing partner, India Sotheby’s International Realty, said, “Mumbai’s real estate market is not only the most expensive in India, it is also among the top few real estate markets that command such high capital values in the world. In fact, in some localities, the per square feet rate has crossed the Rs 1 lakh figure.”

One of the reasons behind such an exorbitant pricing is government fees and charges associated with real estate.

“It is surprising that subsequent governments have shied away from unlocking the true potential of Mumbai’s real estate by easing the leasehold to freehold norms. We believe some serious rethinking is required to create a more robust and equitable housing market in Mumbai,” Saran said.

The white paper noted that property ownership in Mumbai is largely in the leasehold format. Residential, commercial and industrial land have all been leased on varying tenures. As the lease periods come up for renewal or are at the tail end of the lease, the current lessors, mostly government agencies, demand conversion charges for change to freehold status.

“Today, sellers are required to either take permission from the lessor authorities for changes in individual ownership or pay conversion charges of 60-70 per cent,” the paper said.
There are 9 types of leases available in Mumbai today. The white paper is focussed on collector’s land given on lease between 1950s and 1980s for development of housing societies and for commercial and industrial development. These are mostly located in in Central and Western Suburb localities such as Bandra, Versova and Chembur.

Besides high conversion charges, the white paper has elaborated on other practical problems in undertaking conversion of leasehold to freehold properties. The quality of some assets of over 30-40 years has deteriorated and these buildings are in need of redevelopment.

In order to unlock value of properties in Mumbai, ISIR has suggested that the Maharashtra government should come up with a long-term policy initiative to facilitate property owners who wish to convert their assets from leasehold to freehold.

The consultant has urged that the conversion charges should be significantly lowered. And the reduced rates should be applicable for a longer period so that everyone gets a decent time to complete the entire process.

The conversion rates and FAR should be attractive enough for land owners and developers to go for redevelopment. It also pitched for liberalising stringent societal norms (like castes and reservation) to facilitate redevelopment. The payment of conversion charges should be allowed in instalments as such large sums of money are difficult for pensioner allottees or even for builders.

“A system of hefty fines and even cancellation of licences can be put in place as disincentives to a few unscrupulous developers who queer the pitch for those with serious, long-term intent to stay in the redevelopment market,” the paper noted.

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