DHARAVI: DEVELOPING ASIA’S LARGEST SLUM (A)
PROBLEM STATEMENT:
Rance Hollen was concerned about the investment he was willing to make into the Slum project in the India. The problem he faced was the bidding amount that he has to pay in terms of cash. His other investment in the Bombay Stock Exchange was made into Realty Index that decreased by 200 basis points. For the payment of the bid premium, he was reviewing the cost of capital, cost of construction and expected market prices.
ANALYSIS:
To select the bidders for the project Warwick will go for the premium bidder. It is because of the conditions that government has imposed on this project. The condition is that whoever will get the project, he will construct the Slum rehab units as it constructs the profit making construction units. If this condition will be adjusted accordingly to the needs of Warwick, then all of its profit making apartments will be built first and will be sold at priority. This can impact its cash needs for the premium bidder depending upon the IRR of the project, which allows the company to increase the premium bidder’s payments. Customers are the Slum peoples, who are living in a limited space.
Warwick will generate the profit from the free sale components. The free sale components mean the additional spaces created by constructing on the apartments land. Warwick can build an additional floor space, which can be sold in the commercial markets or residential market. In this construction project, Warwick is allowed to sell 133 square feet after constructing the 100 square feet of free housing scheme for the Slum residents. From this Warwick will not only cover the free housing cost but also generate profit by selling the additional floor space into the commercial and residential markets. The company also has the option to use the floor space index at 4.0 for Dharavi, which is higher than the floor space index of 1.3 for private land and 3.1 for municipal land.
After winning the bid of Dharavi Rehabilitation Project, Warwick will grow as it will complete the world’s largest Slum Rehabilitation project. In addition, this will increase the goodwill of the company. From this it will also become a well-known organization for the charitable projects, which lead the company to get more projects in the future. The demand will also increase for the Warwick and it will generate more cash flows as per the number of project as it will receive to develop in other parts of the world. Socially it will receive the recognition as the world’s largest Slum developer, which will create an opportunity for the company as it will be demanded to develop more projects. For the economy it will create more demand and employment opportunities. The Slum resident will also get educational facilities and hospital facilities at lower cost. The infrastructure will also be developed in the project, which creates the mobility and ease of access to all the facilities that urban areas will have. The risk associated for the company is the construction cost and the market prices. The construction cost will increase if the expected market prices will fall as per square feet............................
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Maharashtra is accepting applications to redevelop Dharavi, the largest slum in Asia. Development company assesses risks and tenders bid. Bid conditions include the provision of a new free housing for tens of thousands of slum dwellers. The cost of housing is expected to be paid for by the proceeds from the development and sale of market-rate housing. Although the main concern of construction cost, cost of capital and income from the sale of units, the analysis should consider the many aspects of risk, including political risk, currency risk, market risk and performance risk. Moreover, the discussion covers social aspects including whether the slum should be processed at all, whether it should be revised government or the private sector, and whether to do it in large chunks or in smaller increments. Additional topics to be covered include consideration of what happens with a business previously run out of dilapidated housing, whether it is the market rate units do sell at high prices, if there are tens of thousands of former inhabitants of the slums are located nearby, and whether the slums will be allowed, to resell their units, or they have to stay in them. Other issues include the timing of the project, and ensures the government and private parties to reduce the risk, and whether this model, if successful, could be extended to other slums in Asia. "Hide
by Lakshmi Iyer, John D. Macomber, Namrata Arora Source: HBS Premier Case Collection 26 pages. Publication Date: July 21, 2009. Prod. #: 710004-PDF-ENG
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