Big Bets on small houses

Big Bets on small houses
The Financial Express, India Inc, February 26, 2009, Page I

Saikat Neogi

* Omaxe plans to build one million houses in the price band of Rs 2.99 lakh to Rs 9.99 lakh in 21 states across the country
* Puravankara Projects intends to build 64,500 homes in the price range of Rs 10-20 lakh across five cities
* DLF plans to launch mid-income residential projects in the price range of Rs 20 lakh across the country
* Falcon Realty plans to build a one-room-kitchen flat for Rs 5.5 lakh and a one-bedroom apartment for Rs 9.9 lakh in Alwar
* Orange Properties in Bangalore is constructing 1,800 two-bedroom apartments for Rs 13.5 lakh each

These examples suggest a gold rush like situation in the real estate sector. With the government announcing a series of policy initiative and tax incentives on affordable housing in the last few months, real estate developers across the country are making a beeline to construct low-cost houses and are even modifying their pre-approved plans to construct small size apartments to cater to the untapped market.

For realty developers, venturing into low-cost housing is a new business opportunity. Although there has been a real estate boom in recent years, it has been limited to the middle and upper income residential and commercial property market. But with the economic slowdown and credit crunch, demand in this segment has completely dried up and developers are sitting on huge unsold stocks.

So, why are real estate developers now moving in doves to construct low-cost housing, which till recently was the sole domain of state housing boards? The catch is in the high demand-supply mismatch as the Planning Commission estimates that there is a shortfall of 24.71 million dwelling units in the country, out of which 99% is for LIG/EWS housing.

Anecdotal evidence suggest that about 100 large and medium size real estate companies have lined up affordable housing projects with a price tag of less than Rs 20 lakh in the range of 400 to 800 sq ft in the national capital region, distant suburbs of Mumbai and in tier II and tier III cities. And many are negotiating with various state governments and local bodies for land at concessional rate to construct low-cost houses under the public-private partnership mode as land cost accounts for around 70% of the total project cost. “One of the key themes of 2009 will be a greater focus on low-cost housing, due to demand still outstripping supply, falling land and construction costs and significant government incentives,” says Tushar Poddar, research head of Goldman Sachs in India in a recent report.

Strong matrix
Recession or no recession, the demand for housing will continue to rise due to urbanisation, demographic change and falling household size. Goldman Sachs estimates that an additional 140 million people will move to cities by 2020 and average household size is likely to continue to decline. Both these factors will push up demand for urban housing. Also falling raw material prices and shortage of land will make people to move into small-size apartments. “Ironically, the real estate sector, which was one of the principal causes of the financial market meltdown in the US, may just offer downside protection in India,” say Poddar.

To initiate a sustained development of affordable housing, the ministry of housing and urban poverty alleviation had set up a high level task force under the chairmanship of Deepak Parekh, chairman of HDFC Ltd. Submitting the report in December last year, the task force has underlined the fact that any delay in addressing the problem of housing would seriously affect India’s economic growth and poverty reduction programmes. (See graphic for more recommendations and affordability criteria)

Developers’ strategies
With the economic slowdown, the heady days of building and selling luxury and super luxury apartments are over. Speculative property buyers have scaled down their investment decision and shifted to Rs 20-25 lakh range, prompting developers to shift focus to building affordable housing in a bearish market where demand has slowed down and project funding has become a major concern.

If mega developers are getting into mid-income residential projects, smaller ones are cutting prices across the board to prop up sales. With shortage of working capital and dampened demand for new houses, developers are optimising costs by cutting down on high-end specifications like vetrified tiles, expensive bathroom fittings, and granite flooring. Moreover, a lot of developers are rushing to clean up their highly leveraged balance sheets and are under mounting pressure to meet their interest payment deadlines. In such a situation, building low-cost housing would enable them to generate the much needed working capital because of priority lending by banks and tax incentives offered by the government.

Says Sanjeev Srivastava, managing director, Assotech, “Small size apartments have become the in thing in today’s business and more and more real estate developers are targeting the segment. Affordable housing can be constructed in partnership with the government as land price is very high in India.” Assotech is building two-bedroom apartments for Rs 20 lakh each in Ghaziabad.

To carry the affordable housing business with a long-term growth strategy companies are floating subsidiaries or taking the special purpose vehicle route. For example, Omaxe has set up a subsidiary called National Affordable Housing Infrastructure Ltd to develop low cost houses and Bangalore-based Puravankara Projects has formed Provident Housing and Infrastructure to build affordable homes across the country. Even premium housing developers like Sharpoorji Pallonji and Matheran Realty have chalked out aggressive plans for affordable housing.

Puravankara Projects will invest around Rs 80 billion for its pan-India affordable housing project. The first phase covers Bengaluru, Chennai, Hyderabad, Coimbatore and Mysore where 64,500 houses with a total built-up area of 59.80 million sq ft will be constructed in the next five years. The company is funding these projects through construction debt and customer advances, which would amount to Rs 65 billion, and internal accruals and equity sourcing. In the second phase, the company will cover cities like New Delhi, Kolkata, Kochi, Jaipur and Pune.

Though building small apartments may be the in thing because of the economic slowdown, margins are much lower in this category. And developers are not dithering. “Volumes make up for the lower margins and economics can be worked out with the use of latest technology to scale down the cost of projects,” says Rohtas Goyal, chairman and managing director, Omaxe Ltd.

Stock of urban land for affordable housing remains a major problem. Each parcel of land, depending upon its location and physical attributes, has its own set of problems. A developer of low-cost houses has to take 58 various approvals and no-objection certificates and the waiting time could be anywhere between six months to two years.

“Though the government has introduced a series of sops for developing affordable housing, there are many who are deprived of this basic need. For making houses affordable, the bureaucracy needs to be transparent in regulations and set up a single window clearance. It should also encourage use of local raw materials, which will bring down the cost of housing,” says Navin M Raheja, managing director, Raheja Developers Ltd.

Technology plays an important role in reducing costs on construction. Residential projects could use new prefabricated construction technology where the construction needs to be done at a faster pace with quality control. “Construction cost has to be reduced without compromising on quality and various technology options should be put in place,” says R R Singh, director-general, National Real Estate Development Council.

Experts suggest that core housing, which are incomplete at the time of initial occupation and completed by the inhabitant, should be adopted in smaller towns as it is cost effective, and one can do incremental construction.

Damp demand
Though builders are firming up affordable projects and are advertising them, consumer sentiment is still low and even banks are keeping a tight control on loan disbursement. The latest data from the RBI Monetary Policy shows that offtake of credit for housing had slowed down to 8.8% till December last year from 14.6% during the same period in 2007.

Even after the two stimulus packages and low interest rates offered by PSU banks on loans below Rs 20 lakh, credit offtake for housing remains dismal. RBI data between November 7, 2008 and January 16, 2009 shows that while the aggregate non-food credit grew at 4.3%, housing recorded a credit growth of only 2.49%, underlining the fact that consumers are still in a watch-and-wait mood and expect price of real estate to fall further.

Experts say that the interest rate cuts alone will not help boost real estate sales and reciprocal steps need to be taken by developers. “Demand has to come from actual borrowers and low interest rate has no relevance if borrowers do not come for loans because of high real estate prices,” opines V K Sood, managing director, PNB Housing Finance Ltd.

Buyers are also skeptical about claims by developers. Developers do not mention the end-cost in their advertisements, which could exclude additional costs like parking, external development, preferential location, club membership and power backup. These charges put together can go up to Rs 6 lakh per apartment.

Boosting the economy
Large-scale construction of low-cost houses will boost sectors like steel and cement.The Deepak Parekh committee estimates that alleviating the urban housing shortage could potentially raise the rate of growth by at least 1-1.5% and have a decisive impact on improving the basic quality of life of our people.

Various studies have established the fact that investment in real estate has a multiplier effect on income and employment. It is estimated that every rupee invested in this sector adds 78 paise to the state’s GDP and for every direct job created in the housing industry, eight jobs are created indirectly.

The National Urban Housing and Habitat Policy recognises the need for public-private partnerships and development of various financial and operational innovations for bridging the housing shortage.

Perhaps a lesson can be learnt from China, which has compelled local administration to promote low-cost housing and directed private developers to reserve 70% of their new projects for small units. The government of India has been considering cross-subsidisation but progress will depend on the Centre, state governments and real estate developers acting in a far-sighted way to build low-cost housing.