A low-cost housing project in Boisar, a satellite town outside
Mumbai, offers a taste of how hard it will be for Narendra Modi to
fulfil a pledge to provide affordable homes for every family if, as
expected, his party wins the election.
India
needs about 19 million low-cost homes - roughly defined as costing a
million rupees and below - to shelter an urban population expected to
nearly double to 600 million by 2030 from 2011.
Consultants
Monitor Deloitte estimated that the low cost housing segment represented
a $150 billion business opportunity, but the challenge for developers
lies in earning sufficient margin returns.
At Boisar, a modest
industrial town 100 kilometres north of Mumbai, Tata Housing is close to
completing the construction of 1,200 cheap homes. But faced with
disappointing profit margins the developer has been forced to raise
prices, redefining the notion of what is "affordable".
"It is a
tough model," said Brotin Banerjee, CEO of Tata Housing, which has
invested up to Rs 40 billion in low-cost homes, with about 20,000 units
built or under construction across the country.
Market prices for
Tata's low-cost apartments in Boisar have more than doubled to Rs 1.8
million rupees since off-plan sales began in 2009 when the developer
sold most homes.
But, Tata has failed to generate margins of more
than 20 per cent it had sought and now expects to earn 15 to 16 per
cent, far below the margins of 30 to 50 per cent that mid-tier and
premium housing projects earn developers.
The Bharatiya Janata Party (BJP), led by prime ministerial front-runner Modi, promised in its election manifesto to adopt a low-cost housing policy that would ensure every family in Asia's third-largest economy has a home by 2022.
While
details are scarce, it aims to make land more easily available to
developers, and to provide them with incentives to build cheaper homes.
In
India, housing is a state and not a federal subject, and it is unclear
who will foot the bill in a country where government finances are
stretched, and land prices are under almost constant upward pressure in
overcrowded megacities like Delhi and Mumbai.
Tata Housing's
Banerjee said costs rose and margins shrank in Boisar because project
approvals were delayed, and the company had had to bring in basic
infrastructure like roads, water and electricity - services it had
expected the government to provide.
"I would be pleasantly
surprised if this government or the new government were to really
implement and execute things which they should be doing and which in
their manifestos they profess to do. Definitely anything would be better
than doing nothing which has been the case so far," said Banerjee.
For
future projects Banerjee plans to build on land which has the basic
infrastructure and to secure project approvals before selling any units
off-plan - moves that will help protect margins but also make the homes
dearer.
GUJARAT MODEL?
Value & Budget Housing
Corporation (VBHC), founded by former Citigroup Inc banker Jaithirth Rao
and backed by private equity firm Carlyle Group, has also changed its
definition of affordable housing to units of Rs 3 million and below from
a range of 500,000 to 900,000 rupees in 2009, according to Vivin
Mathew, CEO for western region.
"Unless the government gives a
direct subsidy (to developers) it is very difficult, or unless you make a
really small apartment, I do not see how else you can do it under a
million rupees," he said.
This is putting low-cost homes out of
reach for many price-sensitive buyers, said Madhusudhan Menon, chairman
at Micro Housing Finance Corporation (MHFC), which mainly lends to
people with an income of between 12,000 to 30,000 rupees a month.
In
Gujarat, where Modi is chief minister and which boasts the largest
stock of affordable housing in India, a policy was introduced in January
to encourgage developers to build cheap homes.
Still in its
infancy, the policy invites developers to build low-cost homes on public
land and subsidises part of the building cost. Developers can also
build on their own land, where they are allowed to construct taller
buildings.
Sanjay Shah, founder and CEO of DBS Communities, which
builds low-cost homes in Gujarat, plans to construct 50,000 units by
2020 from 5,000 today.
When Shah started four years ago he capped
the maximum price at a million rupees, but scarce land, a lengthy
approval process and insufficient cheap capital has forced him to
increase it to Rs 1.5 million rupees.
He also failed to meet his
margin expectation of 30 to 35 per cent, and said that if costs keep
rising and there is not enough government support it would soon be Rs
1.75 million.
"We want to have reasonable profits but we are not greedy."