Budget home builders hit by babudom

Budget home builders hit by babudom

Ahmedabad/Mumbai: When construction of affordable homes, in the Rs3-12 lakh price range, accelerated at least two years ago, bleeding luxury home builders viewed it as a quick fix to sew up the holes in their finances. Instead, some of them may have only succeeded in pricking themselves with their own needles.

What lured builders to the low-income housing business was its resistance to downturns from steady and voluminous demand. But cost increases due to government delays and rigid norms are scarring builders’ profits.

“Honestly, it has been a nightmarish experience," says Ramani Sastri, managing director of Sterling Developers Pvt. Ltd, a partner in Janaadhar Constructions Pvt. Ltd, which is building low-income housing outside Bangalore.

“Time is money, and regulators don’t understand that," Sastri adds. “As a businessman, my money carries a cost, and that cost will be passed on to customers."

Based on land costs of around 300 per sq. ft, the gross margins of affordable housing developers are estimated to be 20-30%, according to a July report by US consultancy The Monitor Group.

Still, the wait for government permissions, and subsequently for customer bookings and initial payments comprising 15-25% of sale price, escalates costs, even as builders continue to incur interest on borrowed capital.

It took Janaadhar more than two years to get approval for its project. Regulations also hector builders to create car parks for flats—despite the low probability of target customers owning cars.

These are the norms for any construction plan, but they can hurt the margins of a business selling apartments at Rs3-12 lakh each and targeting buyers with household income of roughly Rs15,000 a month. Such builders bank on speedier execution to control costs and keep price tags low.

Value and Budget Housing Corp. (VBHC), a low-income housing company floated by entrepreneur Jaithirth Rao, has been forced to build 400 fewer flats at its site close to Janaadhar’s project due to inadequate parking space. Local laws mandate one parking space for every pair of one-bedroom apartments and one for every two-bedroom apartment.

As a result, VBHC’s proposed 1,904 budget apartments costing Rs5.5-12.2 lakh, include 1,200 car parking spots. Each parking spot has a Rs50,000-60,000 sale price. But most customers living on Rs15-20,000 monthly salaries—and most likely the first generation to stay in a flat—largely own two-wheelers. “So here’s an asset that we have created, a big chunk of which we will never be able to sell," says Arvind Krishnan, sustainability consultant for VBHC.