(Updates with competitor’s comments on challenges in third paragraph after Mining Diamonds subhead.)
Aug. 26 (Bloomberg) -- By the time Indian developer Babulal Varma stepped in, bulldozers and police with truncheons were a day away from forcibly evicting the last residents of a corrugated-roofed, rain-tarped slum that had grown like a tumor into a prime area of central Mumbai.
This time, Varma recounts, it was an old woman holding up his plans to replace the slum with a $1 billion complex: six luxury towers with million-dollar apartments overlooking the Arabian Sea, coupled with housing blocks nearby with free homes for all the slum dwellers with rights to the land. It’s not that the old woman didn’t want a free apartment. She wanted two. Yet the law permits developers to give only one.
So Varma says he paid her a visit: The woman lived with her two sons, and the sons’ wives, in a 90-square-foot shack. The wives argued. Constantly. Varma listened and came back with a piece of paper showing a separation line drawn through the unit they’d be getting, with a second door cut into the hallway. The wives could live separately, he explained. Agreement came in 45 minutes. Construction began the next day.
“If you can understand their problem, if you can understand their issues, all the issues are very small, like a peanut, but to them this is the biggest thing,” the 44-year-old co-founder of Omkar Realtors & Developers Pvt., who cites karma as his operating philosophy, said in an interview beside an incense-burning Hindu altar. “This is my approach till today. It’s a human approach to each and every person.”
His methods have resulted in 12 completed slum projects with 40,000 residents rehoused so far, 12 more under way -- and billions of rupees in revenue for Omkar, of course.
With the most developments of any Mumbai operator in this niche, Omkar (the long form of the Hindu mantra “Om”) is playing an important role in Mumbai’s plan to do something about its enormous and embarrassing problem: at least 6.5 million slum dwellers, or more than half of the city of Mumbai’s population, still living without running water, private toilets or the basics of sanitation in one of the most rapidly developing financial capitals of the world.
This year for the first time, in the budget announced by Finance Minister Arun Jaitley last month, India’s new administration pledged tax relief to companies undertaking slum redevelopment. The measure seeks to support private-sector solutions, after previous national government initiatives sought only to improve slum conditions, such as by adding public toilets or giving low-interest loans to dwellers.
“We are trying to clean the city and make it a happier and safer place,” said Nirmal Deshmukh, 57, chief executive officer of Mumbai’s Slum Rehabilitation Authority, known as SRA, which began supporting conversions after the city’s demolition efforts prior to the 1980s just drove old slum dwellers into new shanties. “There is all-round social upliftment as people move from slums into proper apartments.”
In other words, with the average Indian needing to work for 308 years to pay for a prime Mumbai apartment, according to Knight Frank LLP, slum redevelopment projects pave a direct path to the middle class, Deshmukh said.
Swarangi Pingle, a 36-year-old housewife, is one of them. Since her marriage to a Mumbai postal worker 13 years ago, she had lived in an 90-square-foot, bi-level hut with her in-laws, her husband’s two siblings, and eventually their daughter, now 11. On May 1, she and her family became Mumbai homeowners in Omkar’s development in the Bhoiwada neighborhood of Parel in central Mumbai -- the one held up by the woman with quarreling daughters-in-law.
Her neighbors in the towers next door will be buying condominiums priced at $590,000 to $1.6 million, built by Omkar’s joint-venture partner, Larsen & Toubro Ltd., a Mumbai- based real estate, engineering and construction group. They’ll have sea views, a mini-theater, a spa, a meditation center and “sky gardens” in the buildings ranging from 40 stories to 60 stories. Previous Omkar complexes are about 90 percent sold out, according to spokesman Suresh Rathod.
The five adjacent 23-story blocks where Pingle lives resemble America’s inner-city housing projects, minus the crime. Her new home, allocated by lottery on her block’s top floor, has no trouble receiving ventilation or sunlight.
In the slum, Pingle had waited an hour to fill water jugs at the communal tap almost every day, and for her turn at the common toilet. Her family was vexed by petty thievery, public urination and drunken brawls.
“This is much better,” she said, beaming as she shows off her clean, private bathroom, her very own kitchen sink and her aqua-painted living room. The new homes are bigger, safer, more sanitary, and allow space for children to study, she said.
“I may have married into a slum, but my daughter won’t go back to one,” Pingle said. “She will only go forward.”
Omkar, which is closely held, had 14 billion rupees ($232 million) in revenue in the year to March, a 40 percent increase over the previous period, according to spokesman Rathod. Profit is in the range of 20 percent, Varma said.
With no land purchase costs, such redevelopment projects can earn profit margins of as much as 45 percent compared with 30 percent or less in other residential projects, according to Ramesh Nair, Mumbai-based chief operating officer at Jones Lang LaSalle Inc.’s India unit. Redeveloped land under Mumbai’s slums, about 9,000 acres, could be worth $140 billion, he said.
“That is why slum redevelopment makes sense,” said Nair. “This is prime real estate right under your feet.”
Omkar has drawn private-equity firms, according to data provided by the developer: 4.5 billion rupees from billionaire Ajay Piramal’s Mumbai-based Piramal Fund Management Pvt., previously called Indiareit; 2.5 billion rupees from New Delhi- based Red Fort Capital Advisors Pvt.; and 500 million rupees from Indian Property Advisors Pvt., also in Mumbai.
“In Omkar we found a developer who rated extremely high on systems and processes in approaching this business while remaining uncompromised on governance,” Piramal Managing Director Khushru Jijina wrote in an e-mail. “Omkar has benefited greatly from positive word of mouth from people who have been rehabilitated.”
Slum redevelopment can involve years of negotiations with people with diverging interests -- including gangsters and slumlords, and residents divided among political lines.
If a firm can get 70 percent of residents to consent, the developer can apply to the SRA to build and sell market-rate luxury apartments while providing 269 square feet free to families proving slum occupancy since 2000. Typically, just five percent of families in Omkar developments have been found ineligible for new homes for lack of long-term residency and had to move elsewhere, according to Omkar spokesman Rathod.
The former slum families own the apartments outright and can sell them after a 10-year lockup period. Maintenance is subsidized or covered by the developer for the 10 years.
An Omkar competitor, the 147-year-old Shapoorji Pallonji Group, has built and continues to expand just one slum redevelopment, the Imperial Towers in central Mumbai, started 10 years ago. Buyers of their 228 luxury units have hired the former slum dwellers as drivers, cooks and cleaners, said Gagan Sharma, head of business development for SD Corp., a Shapoorji Pallonji joint venture that built the towers. The closely held real estate group, with $2 billion in annual revenue, hasn’t announced any further projects.
“Deep pockets have not penetrated this segment,” said Sumanth Kumar, an adviser to Omkar. “Money and power are not enough here. You have to have a human approach.”
Other holdouts Varma said he has persuaded include a woman with a husband in the hospital. Apartments where slum dwellers were being relocated, paid for by Omkar during the construction years, were too far away for her. Varma said he provided a room near the hospital so she would move out.
In another Omkar redevelopment, in the Dadar neighborhood of southern Mumbai, Varma authorized splitting another home in half, just like for the bickering wives, according to Priya Jadav, a 47-year-old former slum resident. The Jadavs insisted on a wall dividing them from their brother-in-law’s family.
“The builder helped us out,” said Jadav, standing in one of her two door frames and noting that the families lived peacefully that way for four years, until 2010, when the brother-in-law’s family moved out and left them a divided apartment now accessed through separate doors in the hallway.
Slum redevelopment has drawn fierce critics. The promise of eventual free housing lures more immigrants to cities, “while the public transport, width of roads, water and electricity supplies are not geared to” handle the population increase, said Uday Athavankar, professor at the Industrial Design Centre at the Indian Institute of Technology in Mumbai.
Developers compress former slum dwellers into a small area, creating “vertical slums” in order to devote as much of the lot as possible to luxury homes that fund construction and subsidize the poor, he said.
“There is a complete compromise on ventilation and on access to sunlight,” said Athavankar. “The distances between these tall buildings are sometimes too narrow to be livable.”
In all slum redevelopments, government regulations set the blocks at 30 feet apart, leaving low-level units in shadow.
Some redevelopers and the SRA have come under criticism from advocacy groups and government auditors. In 2012, a report by the Comptroller and Auditor General of India found the regulator had failed to create proper lists of slum residents eligible to receive free homes. The SRA also wasn’t properly ensuring projects were completed according to time frames or their original proposals, allowing corners to be cut, the report implicating six builders said.
“There was no evaluation of developers, and the quality of the construction was left to their discretion,” according to the government report.
Another investigation commissioned by activist group National Alliance of People’s Movements published last year found irregularities in six Mumbai slum redevelopment projects and cited seven developers involved. The probe discovered “deliberate manipulation and mistakes” in lists of slum residents eligible for housing, fraudulent consent, bullying and intimidation, insufficient checks on developers and a cottage industry dedicated to producing documentation.
“Sometimes ineligible people get free homes, and eligible ones don’t,” said Simpreet Singh, an activist with Ghar Bachao Ghar Banao Andolan, or the Save Houses, Build Houses Campaign, who worked on the report and said Omkar was not implicated in impropriety. “Some slum dwellers are able to procure more than one free home because of their connivance with the builder. There is a nexus between SRA and the builders. The effort is to maximize the free-sale part of the land.”
The SRA’s CEO, Deshmukh, appointed in December 2012, said he has been taking steps since to ensure quality and monitor costs, including making sure only qualified developers are awarded projects and only eligible slum dwellers get free homes. New developments no longer have quality issues, and the state has granted the SRA funding to hire 15 monitors, he said.
“It is a huge task to check on all the houses given out under the SRA, but at least we now have people coming in for that,” Deshmukh said. “Standard operating procedures have been put in place for all the permissions required to be taken from SRA. Proper documents are looked into. Proper procedures are followed.”
Varma, who wears red twine on his right wrist -- a Hindu religious symbol -- comes from a family in the construction business for more than a century, having built stately manors for Rajasthan’s wealthy. Seeing opportunity in Mumbai, Varma left the family business and started Omkar in 2003 with Kamal Gupta, a ship-breaking and steel entrepreneur who is now Omkar’s chairman.
While not shying from competition with redevelopers such as Mumbai-based Sahana Group and Parinee Realty Private Ltd., Omkar stays away from potential projects with unclear land titles, coastal zoning issues or other regulatory tangles. The SRA doesn’t put a number on slum clusters because new ones keep springing up, expanding or merging.
“I may know there are diamonds in the center of the earth, but if I can’t put my hand there to get it, what’s the point?” Varma said.
Parinee has completed four slum redevelopments with 2,000 former slum dwellers and has eight more in the pipeline, according to Monesh Vig, its chief development officer.
“The slum business is a people-oriented business,” Vig said in a phone interview today. “The hardest thing in slum redevelopment is clearing the land and then rehabilitating slum dwellers back on that land within two, three years.”
In one predominantly Muslim slum in northern Mumbai, Omkar faced unusual levels of resistance in convincing dwellers to move out. It’s running a poster campaign in Urdu, the language most residents speak, to assure them they really will get free homes if they vacate.
Omkar employs at least 250 relationship managers, whose job is to convince residents to move out and then help them return to rebuilt homes later, while Omkar pays for alternative housing in the interim.
At the Bhoiwada development, Omkar representatives visit frequently to ensure building elevators are working and there are no leaks from monsoon rains, according to resident Pingle. The developer recently installed awnings over the courtyard to keep rainwater from splashing into hallways.
Omkar also conducts training for new residents -- most of them are moving into a high-rise for the first time -- on how to operate elevators and fire extinguishers and care for common areas including stairs and hallways: no spitting, no littering.
While public housing in other parts of the world can degenerate into crime-ridden squalor, the Mumbai projects show infrastructure improvements and lowered crime rates, such that affluent buyers want to live next door, according to the SRA’s Deshmukh.
Developers are required to build public spaces as part of the complexes, such as cemeteries, playgrounds and gardens, Deshmukh said. Slum dwellers who used to illegally siphon electricity or water become tax-paying citizens concerned with the upkeep of their residences, he said.
“Their kids start going to school. Dropouts reduce. The hygiene improves, and people fall sick less often. Their daughters get better marriage proposals, and their sons are able to find better brides. Crime reduces as the next generation gets on in life with better education and jobs,” Deshmukh said. “And all this happens without government putting in a single rupee.”