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Home / Markets / Mark To Market /  Investors fear slum rehab, and for good reason

Godrej Properties Ltd’s (GPL’s) shares got battered on Friday, falling nearly 10% after announcing a potential investment in DB Realty Ltd for a slum rehabilitation platform as the latter’s poor track record of business and low success rate of slum rehabilitation projects spooked investors.

Godrej called off the deal immediately, following which its stock rose 3% in last two days.

Limited relief
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Limited relief

Many listed companies have burnt their fingers because of high exposure to these projects. Therefore, the fears of investors regarding slum rehabilitation projects are not unfounded.

There are two types of slum rehabilitation or redevelopment projects. “One is where slums are on government land and the people are living without proper documents. The other is where the properties are occupied with proper documents and the redevelopment has to be done because the building may have become too old to be fit for residing. The first scenario is fraught with challenges," said Gulam Zia, senior executive director at property consulting firm Knight Frank India.

In the second scenario, both the government and private developer are involved and the former is responsible for protecting the occupiers by giving them another house in exchange for the one that is being demolished, Zia explained.

“So, a big challenge for a developer is the shifting goalposts in terms of the number of houses to be made to re-accommodate the people. It has been seen that this number keeps rising, making the project less lucrative for the private developer," he said.

Stretched working capital is another challenge. Transition camps have to be set up and this is usually followed by physical relocation of people, industry experts noted. Sometimes, this process takes more than a couple of years. This means a long gestation period and delayed revenue visibility, which is discomforting for investors.

Getting necessary permissions from the authorities could also be a long-drawn affair. “Such projects mainly being part of metro cities, the issue of permissions, transfers, and clearances are subjective as well as prolonged. Thus, the project viability cost differs according to the value proposition it aims to deliver," said Niranjan Hiranandani, national vice chairman of the National Real Estate Development Council.

There are some advantages of engaging in a slum rehabilitation project. These projects are located at attractive locations and tend to enjoy higher margins. Godrej had estimated operating margins of 45-50% from its slum rehabilitation projects with DB Realty.

Moreover, if a developer enters the project when the slum has been cleared, the time taken to just redevelop the property is reduced, thus raising the probability of success. In some cases, the property developer can also avail certain tax benefits, according to experts.

Most importantly, the project cost of slum rehabilitation or redevelopment excludes a major cost component, which is land acquisition, Hiranandani noted.

Yet, making these projects financially viable is easier said than done. Housing Development and Infrastructure Ltd (HDIL) is a good example. “HDIL ended up having huge bad debts given their failure in this capital-intensive segment. DLF has booked an exceptional loss in its Tulsiwadi SRA project. Godrej has faced problems in similar projects located at Bandra and Worli," said an analyst with a foreign research house requesting anonymity.

In its Q3FY22 call, DLF said it has made an impairment provision of Rs224 crore for its Mumbai Tulsiwadi SRA JV project, towards a non-performing asset. Sometimes there are political challenges as well, which make slum rehabilitation a mammoth task, experts pointed out.

Coming to the Godrej stock, it has not recovered fully. The company also declared its Q3 results last week and subdued launches have been a sore point. This could be limiting the stock’s recovery, said an analyst.

While Godrej has backed out from this deal, it may explore projects with DB Realty on a case-to-case basis.

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