Last week I decided to spend a day in India's biggest slum, Dharavi, to understand the sentiment towards the much-touted redevelopment. It was business as usual in that dense locality. There is so much fatigue over Redevelopment given the unsuccessful plans over the decades, that no one is waiting with bated breath. But it seems Adani and the BJP have given a degree of certainty like never before.
Adani Group won the bid for the redevelopment of the 600-acre slum. It has slums, buildings, retail and industry. It's a difficult life for its residents. Some celebrate the slum by referring to it – as the triumph of the human spirit. I disagree. The harsh truth is that Dharavi is a triumph of ruthless politics by the politicians and political correctness by the middle class. The politics allows the flourishing of slums and slumlords. And political correctness permits the middle class to remain silent on that act.
Adani Group has an opportunity like never before. Unlike Gurgaon and other large township projects which are often in the outskirts of cities, the conglomerate has the chance to build a grand city in the heart of the city. DLF took decades to establish Gurgaon. Hiranandani took a decade to find takers for Powai in Mumbai. Magarpatta in Pune took years. With Dharavi, Adani will take months. Adani has the opportunity to overcome the impossible trinity of value, volume and velocity in sales.
Some believe that Adani Group will largely be an FSI supplier after the TDR trump card given by the Maharashtra government. While I am opposed to the trump card, it is foolish to believe that Adani will be satisfied with that ambition. The real money (and risk) is in selling property, not FSI.
A 30-year project
Notwithstanding the aims of the government, the Dharavi Redevelopment will in all likelihood be a 30-year project. A new city is to be built with homes, offices, roads, schools, hospitals, etc. The FSI for development is 4 or is contingent on the amount of rehabilitation done – whichever is HIGHER. Adjusting for the free homes to be built for slum dwellers – it’s almost certain that the conglomerate will have more than 6 crore square feet to sell in the open market. Keeping in mind the price point of its neighbouring locations, an average price of Rs 35,000 per square foot is achievable. That makes the Dharavi Redevelopment potentially a Rs 2,10,000 crore project. While the revenue potential is enormous, a common theme in several slum redevelopment projects in Mumbai is that profits are eventually negligible. The top line is seductive. But the bottom line is repulsive once you have suffered the consequences.
Ultimate test-case
Dharavi will be the ultimate test case. For starters, while it is in the heart of the city – it has land-ownership/eligibility issues that are complicated and will need settlement. The large population as a stakeholder will ensure that politicians are not far away and hence the settlement will not be cheap or easy. Operators in the sphere highlight that 'settlement costs' have previously exceeded the cost of construction in select slum-redevelopment projects. Given however the strong political muscle in support of the Dharavi redevelopment currently, I am optimistic that the challenge can be contained.
The second is in attracting an audience to Dharavi. In a way it is the opposite of Pali Hill. While the Bandra neighbourhood is a glamorous address with Bollywood superstars, it is a terrible location with connectivity and proximity to key hubs. On the other hand, Dharavi is an unglamorous address with slum dwellers but a great location with connectivity and proximity to key hubs. Pali Hill is a status. Dharavi is a stigma. Rebranding and renaming inferior locations is common in Mumbai and I suspect we will see the rise of Upper/Lower BKC in marketing Dharavi. It helps that there will be a price advantage to buying in Dharavi as the government has provided a stamp duty exemption. In Dharavi, stamp duty for the first sale of homes and commercial property is 0 percent but outside Dharavi, it is 6 percent.
Managing cash flows
The third is in the cash flow management. Rs 20,000 crore will need to be invested before the first revenues trickle in. That means heavy borrowing in itself. Thereafter mixed-use development is the plan. It's easy to use home buyer advances to build their homes but commercial spaces like offices are sold only after completion. That means an even greater amount of capital infusion – with debt in high quantum. The expectation is that the cost of debt will be less than 2 percent higher than the yield on the 10-year government bond. Moratorium periods will exist. But any delays in timelines can erode capital values significantly as it has in numerous slum redevelopment projects.
At its core, Dharavi is not just a housing project or even an infrastructure project. It is the chance to move a giant population into a planned city. And break the widespread pattern of slum dwellers selling/renting their free apartments and thereafter creating a whole new slum. Dharavi is an opportunity to get Mumbai back from Slumbai. It must succeed.
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