In India, Low Cost Housing Vs Affordable Housing..!.

Builders / promoters  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 also, reports Mr. Ahona Ghosh. 

 

Builder	Project	Mixing	Uint Size (Sq. Ft)	Price Rs. Lakh
VBHC	Low-cost	15%	300	7.5
VBHC	Low-cost	75%	500	13
VBHC	Low-cost	10%	700	18
Follage Navjivan	Follage Navjivan	100%	330-650	5 to 11
Smart Value Homes	Shubh Griha	50%	400 - 550	7 to15
Smart Value Homes	New Haven	50%	650 - 1,250	15 to 40
Vastushodh	Anandgram	50%	300 to 600	4 to 15
Vastushodh	Ubangram	50%	500 to 900	15 to 30

In the year 2008, Mr. Jaithirth Jerry Rao set up VBHC (Value and Budget Housing Corporation) to build low cost houses of below Rs. 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 flats. However, it has marginalised the low cost premise it started out with.

Low cost houses make up only 15 per cent of a VBHC project; 75 per cent of the units cost 13 lakh each and the remaining 10 per cent cost Rs. 18 lakh each.

Low Cost Housing ..!

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 Rs. 10 lakh and affordable as Rs. 15 lakh to Rs. 40 lakh, and has an equal mix in its projects.

But Mr. P.S Jayakumar, VBHC said this is mere semantics. For us, low-cost &  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 & 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 & affordable housing. The larger the ticket size, the higher the profit margins. Theres also a pull factor.

Buyers are showing a greater inclination towards buying low cost houses for investment purposes, as opposed to living in them, creating upward pressure on prices.

 Nearly  30 per cent to 40 per cent is being picked up by investors in these projects, says Mr. Subhankar Mitra, Head, Strategic consulting (West), JLL India (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 hasnt changed: it is still low-cost. Take Tata Housing, which launched a 100 per cent subsidiary in 2010 called Smart Value Homes to build houses in the Rs. 5 lakh to Rs. 40 lakh range.

The low income tag got them the buzz, but all their projects are mixed, says Mr. Vikram Jain, lead, low-income housing practice, Monitor Group, a management consulting company.

Smart Value Homes has two brands:

Shubh Griha (houses below Rs. 10 lakh) and New Haven (between Rs. 15 lakh and Rs. 40 lakh).

According to Brotin Banerjee, MD and CEO, 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 to 50 acres and we give them (customers ) townships, he says.We dont want our low-cost customers to miss out on the community experience just because their houses cost less.

Jayakumar of VBHC agrees. When poor &  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 Mr. Vicram 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 /builders is how to keep costs down and, by extension, prices. Mr. Jayakumar expects the mixed model to deliver an operating margin of about 15 per cent to 20 per cent, while Banerjee pegs it at 12 per cent to 15 per cent ,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 cost & can not derive the benefit of economies of scale, says Mr. Jayakumar.

Mr. Sachin Kulkarni, MD of Vastushodh, says the current rules & 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 & is planning to enter Mumbai. Mr. Sachin Kulkarni says approvals take at least 6 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 per cent if the approval process is shortened, says Mr. Jayakumar, adding, more states need to follow the Rajasthan lead of single window clearance for affordable-housing projects.

The low-cost segment targets households with a monthly income of Rs. 15,000 to Rs. 20,000 ;the affordable segment Rs. 25,000 to Rs. 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 Rs. 4.5 lakh a year, recently bought a one room set in a Vastushodh project in Yerwada for Rs. 4 lakh.I bought it for investment purposes, says Mr. Kurey, who lives with his family in a 2 BHK in central Pune.

Mr. Kulkarni of Vastushodh said investors have made offers to him to buy an entire building & sell once prices appreciate, but that we do not encourage investors & prefer selling to end users.

According to Kulkarni, not more than 10 per cent of buyers of such projects would be investors. Even among them, he adds, many are deferred users.

Investors Interest..!

Mr. 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 &  blocking out end-users.

The objective of low-cost housing is lost, he says, adding the government should do more, in terms of checks & balances, to support private initiatives & 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 to Rs. 7 lakh.

Today, its price range is Rs. 5 to Rs. 11 lakh.

In another 5 years, it will be Rs. 7 to Rs.12 lakh, depending on land prices, says Mr. Nehal Shah,CEO, Foliage.

According to VBHC, between 2010 and 2012,the price of steel increased by 52 per cent, cement 82 per cent and labour costs 55 per cent.

Still, Mr. Shah finds the low-cost proposition compelling. My premium segment does not subsidise Navjivan (its low-cost offering).They are 2 separate entities and I find the low-cost model sustainable, he says.We invested Rs. 4 crore in the first project and have an RoI (return on investment) of  60 per cent. But Foliage is an exception.

Many players, seeking greater operational & financial stability, prefer the middle ground. And that is the new normal for the low cost space.

Src: ET

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