Bangalore/Mumbai: In June, Mahindra Lifespace Developers Ltd, part of the Mahindra Group, announced plans to build 2,200-2,500 houses costing 10-20 lakh for families earning 20,000-40,000 per month. The company will build affordable homes under a new brand called Happinest, and the first two pilot projects will come up in Avadi near Chennai and Boisar near Mumbai.

Mahindra Lifespace is not only tapping a customer base of first-time homebuyers, but also families that are expanding, said Sriram Mahadevan, business head of Happinest.

“As part of our financial inclusion method, we have already started interacting with potential customers, by visiting industries in the vicinity and reaching out to them," Mahadevan said, conceding that it was difficult to keep investors away although the company will try its best to limit buyers to people who intend to live in the houses.

Mahindra Lifespace is entering affordable housing at a time when the development of modestly priced homes is set for a new lease of life as realtors seek to tap demand from middle-income earners and offset a slowdown in the luxury segment.

Even in a turbulent housing market, the demand for low-cost homes has remained steady. However, unlike during 2010-13, when apartments came for as low as 5 lakh, prices this time are no less than 10 lakh, as delayed approvals and costlier loans squeeze builders’ margins.

An Ajmera Group company is planning to launch a large housing project of 12-18 lakh apartments at Khardi outside Mumbai.

“We haven’t launched the project yet, but have sold 160 apartments just through emailers. There is huge demand from the working class (people) around these areas, who can’t buy homes closer to the city," said a company executive, who didn’t want to be named.

Shapoorji Pallonji Real Estate is adding two projects in eastern and western India, and has a total pipeline of 15-20 million sq ft to be delivered in six years, said Venkatesh Gopalkrishnan, executive vice-president and chief investment officer. Shapoorji Pallonji is looking at an entry price of 18 lakh and 40-45 lakh at the outer limit.

Bangalore-based developer Puravankara Projects Ltd’s value housing arm Provident Housing Ltd, which is building 10.5 million sq ft across six projects, has a pipeline of another 10 million sq ft.

“Sales have been stable and the possibilities are staggering," said Ashish Puravankara, joint managing director.

There is considerable supply shortage of affordable housing—pegged at 18.78 million in 2012–17 by the ministry of housing and urban poverty alleviation, of which 96% is in the economically weaker and low-income categories, according to a May note by property advisory CBRE India. Housing shortage for the economically weaker sections stands at almost 11 million homes, while that for low-income groups stands at 7.41 million homes, it said.

A 2013 report on India’s low-income housing market by consultancy Monitor Deloitte said at least 30,500 units priced under 10 lakh were launched across 132 projects in 22 cities from June 2011 to January 2013. Three cities—Ahmedabad, Mumbai and Indore—have developed well with over 20 projects in each of them, providing houses priced below 10 lakh.

To be sure, challenges remain.

“Activity (in low-cost housing) is not happening in a scale we like. While some of the early people (developers) have moved up the price ladder, regional developers have continued to build in cities such as Ahmedabad, Surat, Rajkot and Indore," said Ashish Karamchandani, executive director of Monitor Deloitte’s inclusive markets team, which prepared the report.

Besides keeping entry-level prices low, another key challenge is scalability, without which it is tough to survive in this high-volume, low-margin space, analysts said.

Ramesh Ramanathan, who founded affordable-home developer Janaadhar (India) Pvt. Ltd in Bangalore, said he had finished his first project in the city and is looking at two more.

“We have approached it slowly and knew from the start that there would be challenges. Most entered the affordable housing segment based on certain assumptions, with no operating evidence of scalable models, but some learnings came out of it in the last four-five years," said Ramanathan.

Ramanathan said that while half of the challenges could be met through market-based solutions, the government must address the rest.

“Not just clearances, every state needs an affordable housing policy, so that there is no confusion between affordable and mainstream housing," he said.

A general cost break-up for an average affordable home would be: 1,000-2,000 per sq. ft for construction, 200-300 a sq. ft for infrastructure (roads, sewerage, electricity), 100 a sq. ft for project approvals, 100-150 a sq. ft for land (this will be a key variable depending on location) and finally, 200-300 per sq. ft for marketing, sales and administration.

The National Democratic Alliance that assumed office in May has promised an affordable housing policy and homes for all by 2022, supported by faster building clearances. The promise cannot be met without a boom in cheaper housing.

“If the government has to achieve its target of housing for all, it has to enable low-cost housing. They have to nudge builders to bring in supply in this segment," said Jairam Sridharan, president, consumer banking, Axis Bank Ltd. “Also, most buyers in this segment are people with income less than 25,000 per month or no regular income and documentation; as a result, availability of credit to this segment is also low. Banks, in fact, find better opportunities in the higher income segment."