Shambhu ST sounds like a man who has discovered Utopia—for well under Rs.15 lakh. The 35-year-old’s compact, two-bedroom apartment on the outskirts of Bangalore is newly constructed, well-lit, ventilated and secure. It is part of a gated residential community called Vaibhava, which includes a park, a children’s playground and a school for his toddler son; his wife, a homemaker, only needs to leave the housing complex once a week for grocery shopping and they have plenty of friends in the community.
The flat’s biggest attraction, however, is its price: it only cost him Rs.11 lakh, equivalent to the cost of a mid-range automobile. “I chose Vaibhava for its affordability, services and amenities,” he says.
There’s only one problem with this idyllic life, it is not what its developer initially intended: to provide low-cost housing to those who can’t afford any better. Vaibhava is the flagship project of Value and Budget Housing Corp. (VBHC), a company founded by former banker and information technology entrepreneur Jaithirth Rao to provide affordable homes for bottom-of-the-pyramid customers.
Shambhu is a senior financial analyst at multinational Honeywell Technology Solutions and can afford the monthly instalment of Rs.22,000 towards his home loan. His obvious delight with his purchase illustrates the scarcity of affordable homes for salaried professionals, not just for informal, low-income customers.
The 21-acre complex of 1,850 units comprises mostly two-bedroom apartments, with some studios and three-bedrooms flats. Two-bedroom flats currently range in price from Rs.14.7 lakh to Rs.16.5 lakh—significantly less than Rs.40 lakh, the market rate of a regular, two-bedroom flat in Bangalore’s Electronics City. “I can’t afford a loan of Rs.40 or Rs.45 lakh, and pay EMIs (equated monthly instalments) for 20 years. This place will fetch me a good return,” Shambhu says, confident of paying his entire loan in five years.
Vaibhava’s location—35 km from Bangalore’s city centre, 15 km from the Electronics City software district—is not a deterrent for him. He commutes to his city-centre office in a shared car provided by his company. The lack of municipal water supply might be a problem, he concedes, but hopes it will be addressed in due course.
Customers like Shambhu have “surprised us”, says Rao, adding, “we also didn’t expect that single women would buy flats as investments or that flats would be bought online”. He attributes the lack of available homes for under Rs.25 lakh as one of the drivers for Vaibhava’s popularity with white-collar professionals.
India’s national housing shortage is estimated at 18.78 million homes, according to a recent report released by the central ministry for housing and urban poverty alleviation. The report stresses that there is an underlying “mismatch between the people for whom the houses are being built and those who need them”, as low-income customers are unable to afford the formal housing solutions currently being offered by developers, resulting in homelessness, congested living, slums and squatter settlements.
Smarinita Shetty, a senior manager at the international consultancy Monitor Group, is working to help address the demand–supply mismatch. Since 2006, Monitor Inclusive Markets, a social impact unit within Monitor, has been encouraging private-sector entities such as VBHC to offer “market-based solutions in low-income housing”, she says. Monitor’s thumb-rule of affordability is 40 times one’s monthly income.
“So if you earn Rs.25,000, you can afford to spend Rs.10 lakhs on a home, but we’ve seen people who earn Rs.50,000 buy in the Rs.10 lakh segment because there is no housing in the 15 lakh segment,” she says. Shetty differentiates between “low-income” homes, or those below Rs.10 lakh, and “affordable” housing, or those between Rs.10 lakh and Rs.25 lakh. “It’s very easy to forget the sub-Rs.10 lakh segment,” she adds.
In the last three years, Shetty has noticed signs of a developer-led market in low-income and affordable housing, serving genuine bottom-of-the-pyramid customers. The trend is auspicious; this sector can impact as many lives as India’s mobile telephony revolution.
Several new entrants have launched projects in this category, motivated by a combination of unmet customer needs, the prospect of building a scalable, for-profit business with healthy margins, and a socially sustainable purpose.
Apartment formats usually include studios, one-bedroom, or two bedroom flats, ranging from 300 to 650 sq. ft in carpet area, with adequate natural light and ventilation. They are housed in a community of four or five-storeyed buildings, with some shared amenities, located on the city’s edges, often outside its official municipal limits.
Nehal Shah, the managing director of Ahmedabad-based Foliage Real Estate Developers Pvt. Ltd, was persuaded by Monitor in 2009 to switch from the family business of building high-end, city-centre apartments to low-income projects on the city’s periphery.
His first low-income project, Navjivan Flats, located in the industrial area of Vatwa, offered apartments in the range of Rs.2.81 lakh to Rs.7.25 lakh. The property attracted a variety of self-employed, informal workers, such as gardeners, lorry drivers, rickshaw owners and tailors as well as industrial workers.
Deepak Patel, a 32-year-old textile worker, who cycles 3-4 km to work in a nearby factory, is an illustrative example. He bought a flat for Rs.3.8 lakh for himself and his mother, having migrated from his village to Ahmedabad several years ago. Happy with his home, he spread the word; 40 friends and family members have booked apartments in Navjivan Flats.
Shah was prepared to manage a vastly different customer base from those in his earlier projects. “You are dealing with people who don’t have a credit history, who are probably uneducated; who are needy. Dealing with these kinds of people needed a change in our perception,” he says.
Importantly, the business has also met his financial expectations. The first 464-unit Navjivan project “was smaller in turnover than the one I did in the city with 16 units”, he laughs, but adds that margins are good, and capital requirements are lower than for high-end projects. Shah has since launched three more low-income projects in Gujarat, and aims to remain in this space.
It is a win-win situation for developers and customers alike, although not without challenges.
Sachin Kulkarni, the managing director of Vastushodh Properties, shares Shah’s upbeat outlook. A Pune-based, first-generation entrepreneur, he worked with developers for nine years constructing upmarket homes, and was drawn to this sector after witnessing how difficult it was for his father, a relatively lower-grade railway employee, to find decent accommodation. Starting with a 10-acre plot on the Pune–Sholapur highway, he and his brother Nikhil launched Anandgram, a 720-unit low-income housing project, most of which is now occupied. His customers include informal sector workers as well as salaried professionals such as primary school teachers and junior lawyers, he says, with monthly salaries between Rs.12,000 and Rs.20,000. Kulkarni estimates that the Pune region alone can absorb 250,00 low-cost units in Pune, and has gone on to launch three more Anandgram projects, alongside Urbangram, the company’s higher-end brand of homes.
Rohit Poddar of Poddar Developers Ltd, a Mumbai-based low-income housing developer with a similar customer base, is equally upbeat about expansion. Poddar entered the low-income housing sector after several years of aggregating land in the Mumbai metropolitan area. Units range from Rs.7 lakh to Rs.20 lakh, and 80% of the units are studios or one-bedroom flats, he says. Having cut his teeth on an ambitious 1,200-unit project in Bhivpuri in March 2010, he subsequently expanded to areas such as Badlapur, both areas being in suburban Mumbai. “We will have launched or constructed 40,000 homes by April 2013” in the Mumbai metropolitan region, he says.
Financing low-income earners
Central to the success of the developer-led, low-income housing model is the active participation of micro housing finance companies, which offer loans to this target audience of “financially excluded people”—people with established livelihoods but no formal documentation of their earnings, or access to conventional housing finance.
They include well-known housing financiers such as Dewan Housing Finance and Gruh Finance Ltd (a subsidiary of Housing Development Finance Corp. Ltd) as well as start-ups such as the Micro Housing Finance Corp. Ltd (MHFC), co-founded by former bankers Madhusudhan Menon, Rajnish Dhall and Nachiket Shelgikar in 2008.
At the heart of operations is the ability to judge a client’s creditworthiness. MHFC devises its own benchmarks for estimating cashflows for over 200 varied professions and trades, from vegetable vendors to tattoo artists to someone in the business of repairing pumps.
Assessment begins at the prospective customer’s workplace, explains Dhall. “If it’s a vegetable vendor, we visit his site and understand what he sells—is it only onions and potatoes, or all vegetables, or any fruits—specialized or non-specialized? Where is he buying from, how much is he selling it for, how many kilos, what are transport charges? A storyboard on his income and business is then created by calculating daily, and monthly cashflows, which are cross-verified.”
A customer’s reasons for investing in a home are also closely examined. If someone has decided to upgrade from a slum to provide better housing for his school-going children, it is a promising indicator that “he may renege on other things, but he won’t renege on his loan repayment”, says Dhall. MFHC has sanctioned 2,000 loans worth Rs.89 crore so far, with an average loan size of Rs.4.5 lakh. The company is profitable, with a zero default rate, he says. “There is nothing exotic about these products, it’s fairly straight EMI-paying loans. There have been no problems with loan repayments so far,” says Maneesh Srivastava, chief executive officer of Muthoot Housing Finance Co. Ltd, a subsidiary of finance company Muthoot, which entered this business in 2011. The company has disbursed loans worth Rs.40 crore so far to around 700 customers, with an average ticket size of Rs.6 lakh, he says.
Demand is robust. Monthly incomes vary from Rs.10,000 to Rs.30,000. Srivastava labels those at the upper end of the income spectrum as the “rich-poor”, clarifying that “you would consider someone earning Rs.30,000 in an entry–level white collar job to be well-off. But you wouldn’t use the term ‘well-off’ for someone earning Rs.40,000 by running a travel and tours business, even though he’s probably a bigger consumer. He wouldn’t be first in line to get a normal housing loan.”
The emergence of micro-housing finance companies and low-income housing developers points to a promising market, but supply-side constraints imply that current offerings are far from making a substantial dent in the national housing shortage. Government clearances and approvals are unanimously cited as bottlenecks by developers, particularly environmental clearances which must be centrally approved and can take as long as a year to be granted. “Government rules are weighted towards rich people. It’s easier to build a farmhouse on a two-acre plot than to construct 100 affordable homes on the same plot, because of approvals,” declares VBHC’s Rao.
“There are 56 departments from whom we need approvals,” complains Poddar.
Unlike other higher-end developers, for whom land is an asset whose price will appreciate, low-income housing developers regard land as “inventory to be rapidly depleted”, says Monitor’s Shetty.
Construction delays due to lack of approvals inevitably result in higher costs, lower margins, or self-defeating price escalation. Most low-income housing developers have had to increase their prices in recent years, to keep up with rising costs.
Land acquisition and lack of infrastructure, such as piped water supply or sewerage lines, also present practical challenges to scalability. “If we go too far out of the city, infrastructure is a problem. The moment we come into the city, land prices are a problem. The moment the government puts in infrastructure, the price goes up,” says Foliage’s Shah.
Kulkarni admits that solid waste management is a problem, as Anandgram projects are located in areas still governed by village panchayats, with no provisions for such services.
Despite the challenges, Shetty is optimistic about the sector’s growth, emphasizing that these “are the first examples of pure, market-based solutions in low-income housing anywhere in the world, where units are funded by private-sector companies and built by private-sector companies. The World Bank is studying our market”.
With 35 developers and 16 housing finance companies active in the low-cost housing market, she spots several entities who have the potential to be national-scale, including corporate affiliates such as Mahindra Lifespace Developers Ltd that intend to enter this space. “Once developers get some momentum, they should each be able to build 10,000 homes a year,” she says.
For all the sector’s promise, it is clearly targeted at a particular segment of the informal economy—those who are willing to live on the city outskirts and commute daily—as Poddar notes. “The people who buy into our projects realize that they would rather be the people who travel back and forth from work. They want their families, wife and kids to be in the kind of environment where there is proper water, electricity, healthcare and education. It is completely different from the slum discussion.” MHFC’s Dhall agrees that “90% of people are not ready to move out of inner-city areas”.
But even if developer-led, low-income housing cannot alone address India’s larger housing gap, at the least it can enable thousands of families to access formal shelter for the first time in their lives. The growing ecosystem in this sector also mitigates prevailing perception that low-income housing is solely the government’s responsibility.
This is the second in an eight-part series.