(Un)affordable Housing (INDEPTH)

Story URL: http://www.vccircle.com/500/news/unaffordable-housing

October 25, 2010 | RITESH VOHRA, SAFFRON ASSET ADVISORS

Come signs of a market recovery and most of the talk about affordable housing remained
just talk!

Affordable housing must certainly hold the distinction of being amongst the most misused words
within the Indian real estate sector. During the property market downturn in 2008 and 2009, almost
every developer (especially those listed and aspiring-to-get-listed) came out gushing how affordable
housing was the new growth mantra and how they would develop ten-twenty-thirty thousand
affordable homes over the next few years.

Market watchers felt this was the great transformation of the Indian property market that they had
been waiting for years. From catering almost exclusively to the mid income and premium segments,
finally the established developers were taking note of the bottom of the pyramid as well. The FMCG
strategy of selling shampoo in one rupee sachets was about to be implemented in the real estate
sector as well.

As events of the last 12-18 months have demonstrated, all these hopes were short-lived. Come signs
of a market recovery and most of the talk about affordable housing remained just talk! Developers
quietly went back to the business of building apartments for the rich and the aspiring.

Most of us involved with the property sector know that as per government statistics there is a
shortage of about 25m homes in India. Some 70% of these are needed in the rural areas and over
80% are in the below INR 750,000 category. For the purpose of this article, I will focus on the urban
markets and on housing priced at INR 750,000 or below.

Despite all the noise, in reality there are only a miniscule number of established real estate
developers operating in this segment. However, in recent times a few new developers have focusing
on this segment exclusively, notably Jerry Rao’s Value Budget Housing and the NYSE listed Homex.
Some of the existing developers involved in affordable housing projects include Tata Housing,
Puravankara and Shriram Land.

The reason why this trickle of projects is not turning into a stampede is because the established
developers don’t find such projects profitable enough on a per sq ft basis. Why work for hundred
bucks per sq ft profit when you can make a thousand or indeed ten thousand? Also, leaving aside
slum rehabilitation schemes, there are no real opportunities for such projects within city limits
because of the land costs involved.

Which is why it is heartening to see niche affordable housing developers emerge and one hopes
there will be many more of them coming up and establishing robust business models. This is a

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segment which anyways requires a different way of thinking compared to conventional real estate
development – the mind set has to be assembly line manufacturing to ensure cost efficiencies,
process management and quicker turnarounds. The sales team has to be able to handle customers
who are used to being regularly fleeced by fly-by-night operators.The architects and designers have
to think on completely unconventional lines when developing master plans and layouts.

Typically such projects are located on the out-skirts of the larger cities, unit sizes are between 300 to
600 sq ft and prices range from INR 300,000 to INR 750,000. Configurations vary from studio
apartments to compact 2 BHKs.

It is interesting that most such projects are profitable on a stand-alone basis without any
government subsidies or support. Also, despite being in the outskirts or far flung locations, most of
these projects have witnessed phenomenal sales velocities, thereby proving the hypothesis that
there is a market which is ready and in fact desperate to get a house within their budget.

Having said that, it is the need of the hour to deliver at least a million such homes a year across
India’s cities. Some facilitation from the government can go a long way in generating that level of
through put. For starters, if only we had adequate transportation infrastructure to allow people to
live 30 km away from the city centre and still reach their workplace within an hour of travel time.

That would allow thousands of acres of relatively inexpensive land to become available for affordable
housing that would be convenient enough for the prospective residents. Till this happens, developers
would have to substitute government infrastructure with private options – bus services to the
nearest transportation hub is a common feature of such projects.

I feel there is no real need for any land or FSI based subsidies for affordable housing projects as that
will vary from state to state as well as be cumbersome to implement. Further, it would be a long time
before this becomes a national movement (JNNURM is a case in point).

Instead, if the central government can announce a tax break (aka 80-IB (10)) for affordable housing
projects meeting certain criteria (size of units, selling prices, number of units, buyers profile etc),
that would be enough for mass scale development activities in this segment to take off. A similar
mechanism can also be enacted for development of rental units in the affordable housing category.
State housing boards could also participate actively by becoming facilitators or developers of such
projects.

As the under construction affordable housing stock grows, we will see rapid growth of micro housing
finance companies as well. Both of these (developers and HFCs) working hand in hand can do
wonders for this segment.

(Ritesh Vohra is the Managing Director, Real Estate, Saffron Asset Advisors Private Limited.)
 

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