You are developer Rance Hollen of Warwick Capital. You have just received an urgent email from one of your investors who has heard that you may be bidding on a “slum project” in India. Obviously, without the financial resources of your investors, you do not have a business, so you must prepare a presentation for this investor to convince them that what you are doing makes financial sense. To justify your investment decision, provide answers to the following questions:
PAD3800 RVC 1198 Module 8 Case 2 Response Form MS
How do you expect to make money on this project? What variables (in Exhibits 5b and 5C) are the most important and how sensitive are they to changes? What are the trends affecting those variables?
I will make money through the free-sale components that will be sold in the real-estate market. The most important variables are the cost of capital, the market/sale prices, and the cost of construction (Iyer, Macomber, & Arora, 2011, p. 1). Also the amount of units built is another important variable. The variables are very sensitive to change. The lower the percent of cost per capital, the higher the ROE, the profit is. The lower the cost per square feet and the greater the price per square feet, the higher the profit is. Mumbai still has a good return on profit in real-estate and several inhabitant who are looking for proper residences, as long as the trend remains, a profit will be made. According to research “planners forecasted a continued growth” in real-estate prices (Iyer, Macomber, & Arora, 2011, p. 2).
Who is involved in this decision and what are their interests? How has this project been received by the participants, especially the residents and politicians involved?
The government and the residents are involved in this decision. The government hopes to remove slum areas and gain favor (i.e. Shiva Sena party) or appease (i.e. the Congress party) the inhabitants. The residents want better housing and facilities for their daily lives. The government has received the project relatively well. The only issue is to ensure that the opposing party does not reject the project simply because it was introduced by the other party. There are some groups of residents that have peacefully protested due to concerns about the project (Iyer, Macomber, & Arora, 2011, p. 7). However, overall residents want a change.
Are there alternative ways to develop Dharavi? Why is the private sector involved in this project at all? Why can’t the private sector do this on its own without paying premiums to the government? What are the pros and cons of allowing private sector participation?
Although there are alternative methods to develop slums like Dharavi. The Dharavi Redevelopment Project is the best plan to help provide residents with suitable homes, aide the government to provide suitable housing, and provide profit for investors. The private sector is involved because there are too many residents in Dharavi and the government does not have enough funds to provide them with suitable and affordable housing; for example, the Prime Minister’s Grant Project was unsuccessful due the this reason and the fact that the slum grew faster than the project could help. The private sector will provide the funding needed to make the homes affordable, specifically free for the residents. The private sector will also be able to make a profit with the extra housing that they will be allowed to build in the redeveloped area. The private sector cannot do it on its own because there are thousands of people living in the area. They would need to find alternative homes for the people in the meantime. They would need to build rapport and trust with the people to get their agreement, which Mukesh Mehta did. It would be an expensive and time consuming project to start from the beginning without the government. They would also eventually need the government’s approval of any projects that they do. The benefit to allowing the private sector to participate is that the housing for the residents will cost the government little to no money for at least 10 years because the private sector will build and maintain most buildings for that time. The additional benefits are that there will be housing for others who want to live in the area and the government will receive money through the premium (Iyer, Macomber, & Arora, 2011, p. 1). The cons is that the government and residents have a limited amount of control and the private sector may try to renegotiate the terms.
Which of the following options you have chosen: (a) bid the minimum 10% premium on the project, (b) bid more than the minimum premium, or (c) walk away from the contest without bidding? Explain your decision.
I will bid the minimum 10% premium on the project. While it has been predicted that the real-estate prices will increase, it is currently showing a decline. Additionally, many other investors are walking away when real-estate prices dropped worldwide and when their international partners were having financial difficulties, increasing the likelihood of me being successful in my bid (Iyer, Macomber, & Arora, 2011, p. 12). Real-estate prices will slowly rise, especially since Mumbai is slowly becoming a global city, so profit is inevitable. There is money to be made with patience and possibly even more if renegotiation is possible.
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