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Mumbai..Real estate at a glance

July 3, 2012

 

 Financial and commercial capital of India, Generates 6% of the country’s GDP and 33.33% of the  country’s tax revenues Diversified services economy comprising Financial Services,    Entertainment, Engineering, Health Care, Technology & Gems & Jewelry among others. Strong pent   up demand for Real Estate especially in middle/upper‐middle/luxury housing, Population density    more than 29,000 people per sq.km ( Highest globally). Rural/urban income divide, rampant  urbanization & better employment opportunities attract people.

FSI in Mumbai is frugal, between 1  to  1.33, Important cities globally have development FSI ranging between 5  to  15, Inadequate civic infrastructure results in growth of slums/shanties.

Impact:

– Limited land and the highest population in the country

– Maximum depth in demand but with trickling supply

– Among the poorest infrastructure

– City with the highest number of billionaires & largest slums

– CBD office space and luxury housing are among the most expensive in the world

What is Redevelopment ?

Redevelopment Developers partnering with Slum dwellers/Tenants to resettle them into High Rise Buildings within the same micro market in lieu of free sale area

Benefits:  Social: 

  • Slum dwellers get self contained houses and ownership, Improved quality of life with education institutions, healthcare facilities and better social Infrastructure including playgrounds and community centres within the development

Upliftment 

• Rehabilitation subsidized by grant of higher FSI (2.5 – 4.0)   Approximately 50% used towards free sale area

Commercial Feasibility

• Consent of minimum 70% of tenants/occupants

• Eligibility only to occupants, irrespective of ownership

• Rehab development prior to development of free sale component

Checks and Balances

• Creation of a Corpus Fund to ensure proper maintenance for new units

 Why do we need redevelopment?

• Socio‐economic Conditions

– Poor sanitation and lack of open spaces

– Lack of potable water and electricity

– Limited access to education and healthcare

– Ineffective/ Dilapidated structures and congested habitation

• City Planning and Development

– Large scale encroachment

• Little space for development of infrastructure projects

• Redevelopment creates more open/living space

• Economic Drivers

– Scarcity of land for much‐needed housing and commercial stock

– Impairs ambitions to create a global financial centre

Redevelopment Potential: Slums

• Over 9 million slum dwellers spread over 8600 acres

Price: INR 10000 – 15000

– Mumbai’s slum population accounts for almost 10% of India’s total

Over 60% of city population Occupy over   55% of city land  (Cost to acquire: INR 2,500‐ 3,500 Price: INR 10,000‐15,000  Cost to acquire: INR 2500 – 3 000)

• Free sale potential in excess of 830 Million Square feet

(Price: INR 18,000 – 30,000 Cost to acquire: INR 4,000 – 5000 P i 10 000 15 000 3,000 )Approximate Revenue potential of INR

7,500 Bn* (USD 150 Bn)+ (Price: INR 25,000‐40,000 , Cost of 4,000‐5000)

Stratagey: 

• Enter projects during the land clearance stage • Early entry ~ significant upside potential

• Entry when capital requirement is high

• Multiple exit options

• Payments linked to milestones

• To Developer through a JDA or land sale

• To strategic investors through a stake sale

• To end users post execution

COLLATERAL SECURITY

 Released on land clearance and/or free sale construction commencement viable

• Enforcement process to be implementable investment and minimum returns in the event clearance of land takes longer than expected

• Mitigates man management / execution risks and practical

PARTNER “SKIN IN THE GAME”

Strategy Rationale

• 20 – 30% of total capital requirement to be infused by the developer

• Disproportionate profit sharing in his favor –

• Ensures project focus

• Aligns interests and incentivizes the significant “hurt money” in the project since profit is largely back‐ended developer to maximize returns

Strategy Rationale

• Investments to be made at an SPV Level with

• Ensures effective monitoring and day to day project management left to the developer

– Escrow account for project cash flow Joint g management of projects

• Active involvement in key decision making

– signatories on bank accounts with respect to major changes in business

– Significant representation on the board with voting rights and stringent reserved matters plan

– First/Second charge on project cash flow and underlying Land/FSI

EXECUTION RISK

Risk Mitigation

• Permissions for freesale linked to rehab construction

• Simultaneous construction of rehabilitation and free

• All money into the project ensuring adequate capitalization sale component can delay projects

• Freesale buildings are typically high‐rises, due to land area sharing constraints

• Significant increase in size and scope of the project

− IRR’s remain favorable due to the significantly lower entry cost

• Option to enforce collateral in case of unreasonable delays

DEVELOPER RISK

• Conservative assumptions on timelines Risk Mitigation

• Niche players with smaller balance sheets involved in a capital intensive business

• Past track record of slum site clearance / execution

• Collateral mechanism to ensure 1.5 – 2x times cover

• Payments linked to evacuation milestones

• Back end upside to the Developer to maximize investment gains

• Option to rope in execution partner

• No cash out & compulsory investment into the project by developer to ensure “skin in the game”

MAN MANAGEMENT RISK

stakeholders, NGO s vested interests

• Logistics of building and maintaining transit and rehab housing

• Consents from occupants ~ time consuming redevelopment

• Established ability to deal with multiple stakeholders

Risk Mitigation

REGULATORY RISKS

• Dealing with vested interest and various regulatory authorities

• Potential time delays

• Well laid out procedure in DCR for evacuation of non consenting dwellers

• Precedents of numerous court rulings in favor of Redevelopment by majority consensus 

Risk Mitigation

• Limited avenues for debt financing 

• Increased participation from Private Equity Players in

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