Why investors are afraid of slum rehabilitation projects

Godrej immediately canceled the deal, following which its stock rose 3% over the past two days.

Many listed companies have had their fingers burnt due to high investment in these projects. Therefore, investors’ apprehensions about slum rehabilitation projects are not unfounded.

There are two types of slum rehabilitation or redevelopment projects. “One is where the slums are on government land and people are living without proper documents. Secondly, the properties are to be occupied by proper documents and to be redeveloped as the building may be too old to be fit for living. The first scenario is full of challenges,” said Ghulam Jia, senior executive director of property consulting firm Knight Frank India.

In the second scenario, both government and private developers are involved and the former is responsible for protecting the occupants, which is being demolished, in exchange for giving them another house, Zia explained.

“So, a major challenge for a developer is the relocation targetpost in terms of the number of houses to be built to re-accommodate people. It has been observed that this number keeps on increasing, making the project less attractive to the private developer. It happens,” he said.

Expanded working capital is another challenge. Industry experts said infection camps have to be set up and this is usually followed by physical transfer of people. Sometimes, this process takes more than a few years. This means longer trading periods and delayed revenue visibility, which spells trouble for investors.

Getting the necessary permissions from the authorities can also be a long-running affair. “As such projects are mainly part of metro cities, the issues of permissions, transfers and clearances are subjective as well as longer. Thus, the viability cost of the project varies according to the value proposition it is intended to deliver,” said Niranjan Hiranandani, national vice president, National Real Estate Development Council.

There are some advantages of getting involved in a slum rehabilitation project. These projects are located at attractive locations and enjoy high margins. Godrej had estimated an operating margin of 45-50% from its slum rehabilitation projects with DB Realty.

Moreover, if a developer enters into the project when the slum has been cleared, the time taken for redevelopment of the property is reduced, thus increasing the chances of success. According to experts, in some cases, the property developer can also avail some tax benefits.

Most importantly, the project cost of slum rehabilitation or redevelopment does not include a major cost component, which is land acquisition, Hiranandani said.

Still, making these projects financially viable is easier said than done. Housing Development and Infrastructure Limited (HDIL) is a good example. “HDIL in view of its failure in this capital-intensive segment liquidated huge bad loans. DLF has recorded exceptional loss in its Tulsiwadi SRA project. Godrej has faced problems in similar projects located in Bandra and Worli.”

In its Q3FY22 call, DLF said it has made an impairment provision of Rs 224 crore for a non-performing asset for its Mumbai Tulsiwadi SRA JV project. Experts pointed out that sometimes there are political challenges too, which make the rehabilitation of slums a huge task.

Talking about Godrej stock, it has not fully recovered. The company also announced its third quarter results last week and the weak launch has been a sore point. One analyst said this could limit the stock’s recovery.

Though Godrej has backed out of the deal, it may explore projects with DB Realty on a case-by-case basis.