India Housing: Where Success Favors the Factory

Published: Sunday, July 26th, 2015 by Lenora

Forbes India ran an interesting story entitled “Affordable housing: Where success favours the brave” – an interview with three major housing players in India, PS Jayakumar, the Managing Director of Value and Budget Housing Corporation, Rohit Poddar, Managing Director of Poddar Developers, and Varun Gupta, the Director of Ashiana Housing.

The article actually highlighted how success in India will favor the factory approach. The insights of these early movers brings to light the new housing model they’re aiming for – an industrial approach, thin margins, ruthless efficiency and serious volume.

The article’s takeaways are no less relevant for many other emerging markets:

·         This generation of homebuilders in India are more like manufacturers than real estate developers. A more traditional development model that caters to higher income groups gives developers margin (literally) to make mistakes, stomach delays and still earn attractive returns on assets. All these players noted early mistakes, now righted. Building for middle and lower income segments doesn’t allow much latitude, so…

·         Homebuilders have to get to scale as quickly as possible. No big insight here for affordable housing. Unless you’re a custom builder and develop up market, scale is critical. As VBHC‘s Jayakumar points out, margins would be “15 to 20 percent of sale price, even lower at times… [with] return on equity… a good 20 to 25 percent… unlike traditional developers who often have 40 to 50 percent margins…” High asset turns are the goal.

“We see it as a purely manufacturing consumer products kind of business…” – PS Jayakumar of VBHC India, quoted in Forbes India. Read more about VBHC here.

·         Attitudes toward land-banking as the foundation for the homebuilding industry vary according to these players. Gupta notes that it doesn’t make sense anymore to build homes solely to cash in on higher land values post-development vs. being a customer-centric company. That would be an improvement on the standard approach to affordable housing (if true). On the other hand, Poddar highlights land aggregation as the first success factor. Jayakumar bemoans long delays from slow, inefficient land administration. Is it possible that land-banking won’t always be part of the affordable housing calculus? Why wouldn’t it be? As long as a company is also consumer focused, driving gains from land over time means the developer selected well (as long as quality affordable housing was developed).

·         Bureaucracy undermines the end goal of affordability. Affordable housing developers in India have been calling for single-window approvals for years. However, as a developer friend once said, “If you do that, everything will crawl in through that window.” Jayakumar calls the approvals for housing development “like a game of snakes and ladders” with “so many approvals to be got that you don’t even know if you have to comply with all of them.” All this creates risk, and risk is reflected in the cost of capital, which will ultimately be absorbed to some degree in the pricing of the product. This challenge undermines the potential to develop truly affordable product. In addition, if, as Jayakumar points out, land acquisition, assembly, registration, surveying and finalization continue to take years not months, then one again has to realize how important land-banking will always be.

·         All point out that branding is a success factor. Even for even lower end markets? These homebuilders have to minimize their cost of capital. To attract investors to this manufacturing model, they have to show they can de-risk projects and generate stable cash flow. To do this over and over requires a reputation, not just with investors but with homebuyers. Why? Lower and middle income consumers are increasingly focused on quality. Jayakumar mentions high quality repeatedly, as an example. Customers can and do now search developers online to evaluate other buyer experiences. They complain bitterly when there are delays or poor customer service.

·         Lack of infrastructure and distance from the city will keep challenging the viability of the affordable housing business model. Homebuilders still can’t deliver a livable community close to the city at a price point attainable for entry level buyers. According to Gupta, “in projects where the cost is viable, the land is far away from any source of infrastructure.” As long as indebtedness stay low and the assets retain value or appreciate, then India may avoid the pain of Mexico’s housing crisis even if communities continue to pop up hours away from the city. Still, investors, homebuilders and mortgage banks should be aware.

·         “Entry level” housing is a more market- and customer-friendly way of talking about this segment. It’s a small point but low cost or affordable housing entails some stigma whereas the term, workforce housing, often used in the US or entry-level housing somewhat levels the semantic playing field. From a business perspective, it does underline that developers have to focus on the growing mass middle income markets, with carefully managed exposure to lower income homebuyers.

Overall, it’s excellent to see mainstream media outlets covering the affordable housing business, but the Developing Smart Cities team would like to see more of the following topics. We’re working hard to bring more of this to the site as well.

·         What are developers doing to improve the livability of these communities even as they ramp up efficiency and minimize project execution horizons?

·         How are residents coping with limited transportation options and long commutes to work?

·         What’s being done about necessary services like schools and health care?

·         What’s happening with asset management and maintenance of these developments over time?

·         How are developers managing (or generally not) greenhouse gas, especially carbon, emissions given the footprint of homebuilding – or even any sustainability issues at all? Are there any pressures to do this more?

·         What about rental housing? What’s the response to this major market need and gap?

Now that the Smart Cities Mission in India is soaking up so much bandwidth, the Housing for All agenda in India has to be especially clear both in its business goals and in its ability to meet those goals sustainably and with a long-term positive impact.