Low cost housing

HOUSING

Redrawing the Low-cost Model

Builders are finding it difficult to make profits in the true low-cost housing space and are, increasingly, moving their core business proposition to accommodate higher price points.

    In 2008, Jaithirth ‘Jerry’ Rao set up Value and Budget Housing Corporation (VBHC) to build low-cost houses — of below 10 lakh each — for the urban poor. Four years on, VBHC has completed the first phase of its maiden project in Bangalore, and sold 400 apartments. However, it has marginalised the low-cost premise it started out with. Low-cost houses make up only 15% of a VBHC project; 75% of the units cost 13 lakh each and the remaining 10% cost 18 lakh each. Market players term these higher price points — which target those seeking bigger, better houses and having the ability to pay a little more — as ‘affordable housing’. Increasingly, companies in the stated business of low-cost housing are operating, in varying degrees, in these pricier spaces. For example, Tata Housing defines low-cost as below 10 lakh and affordable as 15 lakh to 40 lakh, and has an equal mix in its projects. But PS Jayakumar of VBHC says this is mere semantics. “For us, low-cost and affordable are interchangeable terms,” says the managing director of VBHC. “We target salaried people who are willing to invest a little more. It is not for people below the poverty line or at subsistence levels.” Such an evolving price-volume split, and the splitting of hairs over the definition of low cost, is a challenge and reality for builders in this space. Rising input costs, and the extraneous costs related to real estate in India, is making a pure low-cost project commercially unsustainable. This is pushing builders to adopt a hybrid model — a mix of pure low-cost housing and affordable housing. The larger the ticket size, the higher the profit margins. There’s also a pull factor. Buyers are showing a greater inclination towards buying lowcost houses for investment purposes, as opposed to living in them, creating upward pressure on prices. “About 30%-40% is being picked up by investors in these projects,” says Subhankar Mitra, head, strategic consulting (west), Jones Lang LaSalle India, a real estate consultancy, adding that the very idea of low-cost housing is under threat. 
Hybrid Model 
In spite of moving up the price curve, the positioning of builders hasn’t changed: it is still low-cost. Take Tata Housing, which launched a 100% subsidiary in 2010 called Smart Value Homes to build houses in the 5 lakh to 40 lakh range. “The lowincome tag got them the buzz, but all their projects are mixed,” says Vikram Jain, lead, low-income housing practice, Monitor Group, a management consulting firm. Smart Value Homes has two brands: Shubh Griha (houses below 10 lakh) and New Haven (between 15 lakh and 40 lakh). According to Brotin Banerjee, MD and CEO of Tata Housing, both brands co-exist in most projects; some, though, are only under the New Haven brand as the land prices there are higher. “Our projects are usually spread across 40-50 acres and we give them (customers) townships,” he says. “We don’t want our low-cost customers to miss out on the community experience just because their houses cost less.” Jayakumar of VBHC agrees. “When poor and rich communities stay together, security issues are better than communities segregated from each other,” he says. “Our aim is not to build ghettos but vibrant communities where social balances are useful, apart from the economic compulsion of the project.” More groups are looking to enter this space, including Mahindra and TVS. Both declined comment as their projects were in the conceptual stage. But Jain of Monitor, who has spoken to both groups, says Mahindra is focussing on the low-cost segment and TVS on the affordable-housing segment. 
Lack Of Standardisation 
The main issue before developers is how to keep costs down — and, by extension, prices. Jayakumar expects the mixed model to deliver an operating margin of 15%-20%, while Banerjee pegs it at 12%- 15%, adding that a builder needs to achieve “economies of scale” to succeed in this format. A pre-requisite for economies of scale is standardisation: like uniformity in sizes, in design. But building laws — for example, built-up area and open-space norms — vary between cities, even across localities in a city. “It increases our cost and we cannot derive the benefit of economies of scale,” says Jayakumar. Sachin Kulkarni, managing director of Vastushodh, says the current rules and operating environment disincentivise a pure low-cost model. “The bribe we pay for premium-housing projects is the same as for our affordable category, with the same amount of paperwork,” he says. Vastushodh, which works on a hybrid model, has 12 projects in Pune and is planning to enter Mumbai. Kulkarni says approvals take at least six months. “The longer this process, the higher our costs — our capital assets remain idle, gathering interest,” he says. Similarly, for its maiden project in Bangalore, VBHC had to wait 18 months for approvals. “We can reduce our costs by 20% if the approval process is shortened,” says Jayakumar, adding, more states need to follow the Rajasthan lead of single-window clearance for affordable-housing projects. 
    Investor Inflation 
    The low-cost segment targets 
    households with a monthly income 
    of 15,000-20,000; the affordable segment, 25,000-50,000 a month. The supply 
    of low-cost units is not only being challenged at the builder end, but also, unintentionally, by buyers such as Manoj Kurey. This 52-year-old medical representative in Pune, who earns 4.5 lakh a year, recently bought a oneroom set in a Vastushodh project in Yerwada for 4 lakh. “I bought it for investment purposes,” says Kurey, who lives with his family in a two-BHK in central Pune. Kulkarni of Vastushodh says investors have made offers to him to buy an entire building and sell once prices appreciate, but that “we do not encourage investors and prefer selling to end-users”. According to Kulkarni, “not more than 10%” of buyers of such projects would be investors. Even among them, he adds, many are deferred users. Mitra of Jones Lang says investor interest in the low-cost space, which is being fuelled by low ticket prices, is counter-intuitive to the idea this segment stands for. “The pool of investors is very large, and they are pushing up prices and blocking out end-users. The objective of low-cost housing is lost,” he says, adding the government should do more, in terms of checks and balances, to support private initiatives and ensure supply reaches genuine beneficiaries. There are few pure low-cost players left. Even those left are raising their floor prices. For example, Ahmedabad-based premium developer Foliage, entered this business in 2008, with apartments of Rs 3-7 lakh. Today, its price range is 5-11 lakh. “In another five years, it will be 7-12 lakh, depending on land prices,” says Nehal Shah, CEO of Foliage. According to VBHC, between 2010 and 2012, the price of steel increased by 52%, cement 82% and labour costs 55%. Still, Shah finds the low-cost proposition compelling. “My premium segment does not subsidise Navjivan (its low-cost offering). They are two separate entities and I find the low-cost model sustainable,” he says. “We invested 4 crore in the first project and have an RoI (return on investment) of 60%.” But Foliage is an exception. Most players, seeking greater operational and financial stability, prefer the middle ground. And that is the new normal for the low-cost space. 

 This article was published in Economic times in Mumbai on 6th Dec 2012. 

The above toipc if the the most talked one across India. The developers are targeting only the 4-5 % people who pay taxes. Who is bothered about the the remaining 95%. Can they really afford any house below 15 lacs. You see everywhere in Pune the minimum price of a 1 BHK is not below 35 lacs in a good upcoming suburb. But there are some available in remote places like Talegaon, Phursungi, foot hills of Sinhagad, Ranjangaon but who is buying them? Again retail investors, localities in that area,  guy who works in city limits will find it very difficult to commute from remote places.

The basic raw material which is the "Land" the real "Real Estate" is very costly and it is not becoming any cheaper. The land which is in Government's hands, some portions of it should strictly be reserved for Low cost and affordable housing only. Otherwise  it is going to be very difficult to handle the situation in the near future.

Regards,

Hitendra