Low-cost housing in Peri-Urban areas in India

Abstract

The housing shortage in India is estimated to be 26.53 million, 99% of which is in the economically weak segment or lower income groups. While the rural housing shortage has decreased over last few decades, the urban housing shortage has been continuously rising. The primary cause of the this urban housing deficit is lack of supply of housing at 'affordable' price points for the households with low monthly income and lack of low ticket financing options for the informal and semi-formal sector. The affordability of a household unit can be defined and computed in terms of monthly household income. For example, affordable price point for household with monthly income of Rs 7,500 is computed to be Rs 3.13 lacs. The opportunity size of the low income housing in India is computed to be worth USD 209 billion or INR 940,465 crores. Last couple of years have seen a spurt in the number of players in this traditionally ignored segment, which is attributed to two major reasons – effect of recession on the real estate industry and growing urbanization and Indian middle class. Owing to the booming real estate industry in the pre-recession days, most developers bought large land parcels by highly leveraging their balance sheets. With a slowdown due to recession, these developers were stuck with huge land banks and high leverage and thus had to look for alternate customer segments. Further, the demand for affordable housing in India is greatly driven up by growing urbanization and rising income levels leading to a sizeable middle class. This has made the sector attractive for the developers. Further, prestigious consulting firms like Monitor and Knight Frank have strongly advocated viability of a market based solution in this space, which has improved credibility of the proposition. Apart from the mainstream real estate players, the sector has also witnessed entry of some corporate, who are looking this space as a manufacturing opportunity and are focusing on scale. VBHC is one such player which has ventured into the market with a mission to build one million homes in ten years. Value and Budget housing corporation was promoted by Mr Jaithrith (Jerry) Rao in Aug'09. VBHC has a great leadership team, a mix of people from the construction Industry and Jerry's old team The company determined affordable price points from the demand side and worked backwards to decide its various offerings. To enhance the affordability of its products, VBHC charges a gross margin of 20-30% as compared to the industry average of 100-150%. It launched its first pilot project, Vaibhava in Aug'10 near Electronic city Bangalore and will be launching five more projects at Bangalore, NCR, Mumbai, Chennai and Hyderabad by this year end. Project Vaibhava is spread over 19.8 acres of land with 1200+ apartments on offer in 2 BHK/1 BHK and studio configurations. The company follows a standardized value-added design and plan to replicate the same in its upcoming projects. VBHC has partnered with Western Forms Inc., USA to use its Engineered Metal Forming Systems for concreting. This enables the company to build as rapidly as 100 apartments in 54 days. Direct repercussion of this technology is cost reduction on account of labour, re-construction and finishing costs and increased capital efficiency due to faster turnarounds. This is the biggest enabler for VHBC allowing it to market its apartments at affordable prices. It can be inferred from VBHC's study and secondary research that existing business needs to change their basic approach to serve the low income segment efficiently. Land has to be used as an inventory and not as an asset waiting for capital appreciation. Also, developers need to focus on reduction of project life cycle by building faster and thereby having faster turnarounds to compensate for lower margins. Sample calculation shows that a project can earn IRR of 43% with gross margins of 19.1% for construction time of 18-20 months. Also, businesses need to have a disciplined change in the entire value chain focused on dissipating value to customer. It can be further inferred from the project that serving the target income segment of 1-2 LPA is a difficult task. The developers need to build a self-sustaining community because of usually large distances of these projects from the city centres. There is a heavy participation of investors in the market. The lack of appropriate low-ticket housing finance for informal class also plays a deterrent to serve this segment. Moreover, the penetration of affordable housing to further bottom of the pyramid might be impossible for self-sustainable private organizations to address. The affordable size of a dwelling unit for households with monthly income of Rs 3,000 is 80 Sqft, which is too small to build individual housing units and thus have failed to attract participation from low cost housing players. The government can help promote the low cost housing market in India by facilitating long term supply of reasonably priced land, revising the floor space index – the current FSI is obsolete, especially for a land scarce country like India. It further can improve affordability by relaxing stamp duty, sales and service taxes on low-ticket houses, which accounts for 12-15% of the total value paid. The government can also help by instituting faster approval mechanisms, especially for low income focused standardized projects. The Size of the low cost housing market is undoubtedly large and considering that most part of it is underserved, affordable housing is a huge business opportunity. Even though financing is currently a hurdle, this market too is expected to emerge. However, to serve the affordable market conventional business models using land as an asset might not work. Having a mindset of a manufacturing company, viewing land as inventory and building quickly to maximize IRR with low margins are the keys to success in the industry.