Affordable housing: Builders finding difficult to make profits in low-cost housing space

In 2008, Jaithirth 'Jerry' Rao set up Value and Budget Housing Corporation (VBHC) 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 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 Rs 13 lakh each and the remaining 10% cost Rs 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 Rs 10 lakh and affordable as Rs 15 lakh to Rs 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 Rs 5 lakh to Rs 40 lakh range.

"The low income 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 Rs 10 lakh) and New Haven (between Rs 15 lakh and Rs 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.

Source: articles.economictimes.indiatimes.com