Column, Chandran Nair: Ethical Corp
Property developers must be given the right incentives to build low-cost, affordable housing for city slum dwellers in Asia, argues Chandran Nair.

The scale and speed of modern urbanisation is a critical global trend that is shaping the future. In Asia migration is mostly occurring in poor and middle-income countries such as Indonesia, the Philippines and India where one in three urban inhabitants – an estimated one billion people – live in slums.

Ironically, many slums sit on much coveted highly valued land in central parts of major cities. Because of this, some have called for developers to re-house slum dwellers in high-rise buildings at affordable prices and then use the remaining freed-up land to create profitable developments for the growing middle class. These sorts of projects, which have already happened in cities such as Mumbai, seem to promise a win-win for developers and the poor alike.

Yet critics continue to doubt their effectiveness. First, they argue that slum residents are too poor to pay maintenance charges for basic services in modern facilities, even if they are provided with housing rent-free. Second, there are just too many people who will need to be re-housed to make the schemes profitable for developers. And third, re-settlement in high-rises could destroy the livelihoods of many of entrepreneurs who depend on ground floor access to run storefronts and offer services.

But these objections do not seem insurmountable if one considers that, despite the squalid living conditions they endure, many poor migrants have actual purchasing power. Evidence for this lies in the existence of the “poverty penalty” or premium that people must and do pay just to survive in illegal communities.

This penalty is put in place by local monopolies that take advantage of inadequate access and distribution to offer basic services at exorbitant rates. In slums like Dharavi in Mumbai, for example, sums can be up to 25 times higher than those paid by richer consumers pay for the same services, according to “Bottom of the Pyramid” author CK Prahalad.

If granted legal titles to their homes, slum dwellers are more likely to spend this disposable income on reliable water and electricity, sanitation and maintenance than less essential items. Furthermore, to preserve the newly acquired dignity of having a personal toilet and a clean play area for children, individuals in Mumbai for example, are already doubling their high rise flats as factory floors to make a living.

Poverty penalty

Perhaps the most formidable barrier to massive low-cost housing initiatives is that it serves authorities in many cities to maintain the status quo so as to benefit from the “poverty penalty” or simply to keep property prices high. In many instances city authorities receive a cut of the premium slum dwellers pay for services that the state does not provide. They also receive bribes from developers who have an incentive to keep prime property scarce to maintain high prices.

This is where pressure from large socially conscious developers can play a positive role. The Middle East’s largest developer, Emaar Properties, plans to launch low-cost housing businesses in Morocco, India, Pakistan, Egypt and Palestine in the near future. According to chairman Mohammed Alabbar, the venture is a socially driven initiative.

The good news for developers is that such projects are not by any stretch purely altruistic. Instead they are a viable way to find fresh sources of revenue, especially if also linked to housing developments for the more lucrative middle-income market.

The mechanism in effect would work as a cross-subsidy – namely low-cost housing in return for low-cost land. While land and construction costs of slum re-housing amount to about a third of the total project cost, the land cost is actually much below the market price because developers often obtain land concessions from the government at a highly discounted rate. With this sort of arrangement, the prime property that becomes available after slum dwellers are adequately housed is effectively a “pot of gold” for developers.

With such lucrative opportunities in plain sight, many of the developers in Mumbai, Delhi, Jakarta, Manila and Bangkok should strive for a piece of the re-settlement pie and put forth a business case that has undeniable social responsibility benefits. Perhaps some of the successful developers in Hong Kong, Singapore, Japan and Malaysia should also look at entering these markets given their financial strength.

Apart from profiting from these investments they can provide local developers with invaluable knowledge on the models of well constructed, high density public housing that have been effective in their own countries. If public-private partnerships can be well structured to address the concerns of critics who see high rises as detrimental to the urban poor, the dire urban landscape so common in Asian cities will change forever.