#dharavislum

I have always been curious why homebuyers and real estate developers in Mumbai are reluctant to name the one stakeholder in the real-estate chain that singlehandedly escalated prices. You might think I am referring to the government? No. It is actually slums that are the culprit for killing the real estate market in Mumbai.

Up to 35,67,12,299 square feet – that’s the extent of encroachment by slums in Mumbai, according to the Slum Rehabilitation Authority’s (SRA) slum cluster list of 2015. This translates into almost 8,189 acres of land across 2,400 clusters. For a city that has habitable land of around 34,000 acres, this means almost a quarter of the land in India’s financial capital has been encroached by slums.

In value terms, at an average rate of Rs 40 crore an acre, it translates to Rs 3.27 lakh crore — or roughly 12.5 percent of the GDP of Mumbai —being usurped.

There is a plan in the works

The reason for citing these numbers is on account of a plan in the works by the new Maharashtra government to offer 500 square feet houses for free to slum dwellers. In all likelihood, this plan will get watered down but policy thoughts like these at regular intervals are a striking reminder of what has completely ruined the real estate market in Mumbai. Free land scarcity and its consequences for the actual homebuyer over the last three decades.

While the encroachment of 24 percent of Mumbai’s habitable land may be illegal – a misplaced sense of empathy, as well as political rent-seeking, has ensured that the actual owners (Trusts, Railways, AAI, BMC, private owners etc) are forced to compensate and rehabilitate the unauthorised tenants. This may appear as being compassionate to slum dwellers but is outright penalizing of other stakeholders in this real estate chain.

In a report presented to the University of Texas at Austin, Rohit Jagdale notes presciently the rise in subsidy provided to slum dwellers. From a direct subsidy of only 10 percent in 1985, it rose sharply to provide free housing to residents of slums along with a corpus to handle future maintenance expenditure by 1995. Even free housing had new sweeteners since then. The size of apartments rose from around 150 square feet to 225 square feet to the current level of 322 square feet.

Stacked against homebuyers

This is what typically happens in an SRA project. Developers build free homes for slum dwellers on part of the land that had been encroached upon and build towers on the remainder that are on sale. Simply put, a homebuyer in the new tower is expected to subsidise the free housing for the slum dweller.

Given this bonanza, one would have expected that slums would be lining up for getting redeveloped. Except it is half-baked announcements from governments that raise expectations frequently, dubious developers and financial unviability that have ensured that schemes remain largely on paper.

Note that only around 2 lakh replacement homes have sprouted over two decades despite the approval of 1,481 projects by the SRA. Nothing exemplifies this phenomenon better than the almost 600-acre slum – Dharavi. Planned almost two decades ago, residents were initially promised 225 square feet homes in 2004.

This was recently raised to 350 square feet thereby escalating the cost of the redevelopment project. Today the slum stands almost as it did two decades ago even as the centre of economic activity shifts away from it.

Slum-dwellers do take a big responsibility for the failure of the rehabilitation scheme. Aided with the support of local mafia, forgery and deceit are common with regards to the list of beneficiaries escalating project cost.

Several of the slum dwellers who do get free apartments opt to rent the apartment and create another slum. The moral hazard has attained such lengths that migrants who earlier preferred to stay in a home in distant locations and travel long distances for work abandoned those plans and opted to stay in a slum close-by in the hope of it getting redeveloped.

And they are getting a free flat. This has suppressed demand for new homes in distant locations of Mumbai while inflating the price of slums in the city.

There are a few shining examples as well. One of the best examples of a brilliant SRA project is the Shapoorji Palloonji building 'The Imperial' housed at Tardeo.

The developer provided 225 square feet tenements to the slum societies as per the norms and built two luxury towers for sale which today command prices of anywhere between Rs 15 crore and Rs 25 crore and houses the elite.

Now market forces have come into play, however. Expensive land parcels that became open for development have boosted the supply of homes at elevated prices, which are simply not seeing demand. That has eliminated the investor audience for real estate in Mumbai.

Accrued supply continues to be on the rise from projects that were conceived years ago. No wonder major developers realise the futility in embarking on these SRA projects. The cost of land acquisition (free homes + interim rent and other benefits.

I am not even going into the hassle involved in driving consensus among tenants) is no longer lucrative – especially when demand is stagnant and new supply is unable to be absorbed. Every rigged and unfair system in a market economy has to correct itself. As I noted in another column, most new 1BHK apartments are being constructed at a size of lesser than 300 square feet.

Effectively, homebuyers are getting smaller homes at high prices while slum dwellers are getting bigger homes for free. This game is on its final legs.

The real estate market has had a good run in Mumbai but it has to self correct dramatically to have any chance of survival.

The first step has to be the reform of the slum rehabilitation program that makes it prohibitively expensive for an actual homebuyer. Otherwise, this slump in Mumbai real estate will end badly – for developers, slum dwellers and the genuine homebuyer.