His hypothesis is a simple one. India’s real estate boom was built around its emerging middle class. Nobody gave low income housing too much thought. As Deepak Parekh, executive chairman of Housing Development Finance Corp. explains, “it was way too profitable to be doing something else.” Why sell low-cost houses as long as you get chumps to buy them at several times that price?I must agree here - lower cost housing is very important and has been ignored. I think there's money here, tons of it.But when Ashish Karamchandani, CEO of research firm Monitor India, did the math for a study for public sector National Housing Bank in 2007, he was astounded. He found there are 23 million Indians earning at least Rs. 5,000 a month who do not own a house but aspire to do so. Doubtless, lenders know this potential but have stayed clear of pumping money into low-cost housing because of small ticket sizes of such loans. Also, they weren’t ready to take the credit risk with this segment.
A large addressable, but ignored market with a crying need for a winning business model. Could a fired-up entrepreneur ask for anything more?
To those who want the math: An acre close to a city is available for about Rs. 50 lakh to 5 crores. That's between 100 and 1000 rupees a square foot. Let's just say 400 is what a low cost builder will get. Typically you could build a 1:1.5 to 1:2 FSI for lower income housing, so you can build around 80,000 sq. ft. in an acre (which is about 44K sq. ft). This is "built up" area, or what can be sold to a buyer (includes common area, lifts etc.). If you were to construct 700 sq. ft. houses it would be enough for those earning about 5-10K a month (and in Mumbai, even 10 lakhs a month, it seems). That's about 100 low cost houses per acre. Each house takes about Rs. 800 per sq. ft. to construct, so the construction cost of a house is about 5.6 lakhs. The land cost, at about 2 FSI, is about 1.4 lakhs (700 sq. ft at 2 FSI is 350 real sq. ft. x 400 per sq. foot cost). A total of 7 lakhs.
In an acre, if you can build a 100 flats, it will cost you about 7 crores. You could sell these flats at 10 lakhs each - a cost of 1400 per sq. ft. is cheap, especially where the other options are 300 sq. ft+. Economy of scale will make 1 acre plots difficult but you could do well with 3-5 acres at one spot.
If the demand is here, then getting the cost of the project financed by customers should be very easy - they can pay in 10 installments of 10L each. Assume then, that for construction and paperwork etc. you will need to only spend an upfront amount of Rs. 3 lakh per flat - the rest will come from the buyers' installments. You get revenue of 10 lakh on a cost of 7 lakh per apt - a profit of 3 lakhs. For an investment of 3 lakhs, that's a 100% return!
And I'm being conservative: Most builders will own land at substantially lower holding costs than the 2 crore an acre I expect someone to buy it at. Plus, construction costs will go lower as cement, steel, ceramics etc. drop off a cliff in terms of prices.
If it's so good why don't builders do this more often? Because the profit margins on premium apartments are substantially higher - 400-500%. It needs the thoughts of someone outside the industry to realise that even 100% is a great margin. Even if you account for the fact that not all flats will be sold early etc. it's a great deal - and the demand will get addressed where there is literally no large scale supply.
I love this space. With the real estate crunch for the lower middle class, and a glut in the high income space, it is our only real growth opportunity. Many people have realized it - like the article mentions, companies like Godrej, Tata and Sintex are scaling up. But don't believe for a minute that they are doing it from the goodness of their hearts. Oh no, they're not. They are just doing what should have been done by everyone far earlier - addressing the lower-middle-class demand, and earning a pretty good margin out of it.
Heck, if I had the money, I'd be doing it too.
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>I don’t know where you got the “Rs.800 per sqft ” construction cost. It is about 1500, not including paraphet railings and sump in Chennai :-( The real killer here is not material cost but labour which has simply not come down thanks to NREGA scheme and Rs1/kg of rice (courtesy of state govt). A mason demands 450 per day.
This also explains why apartment prices have not come down by much in chennai as against other cities.
So it would be interest
05.22.09 at 3:59 AM
>Cacaphonix: Seen three cities – Blore,Mumbai and Delhi – and have contractor/builder contacts in each one, and the average cost per sq. ft. without snazzy interiors can be as low as 600 per sq. ft. (including vitrified flooring, which is a darn cheap good looking flooring)
Even with fairly good interiors, you can get by with 1500/sq.ft.
05.22.09 at 6:23 AM
>Deepak
You are right. This low cost housing is a fantastic opportunity
Ganesh
05.23.09 at 12:12 PM
Deepak,
Your assumptions have glaring glitches. If you have FSI of 2, that means you can develop 80k sqft, but not construct entirely on it. Usually, district wise bye laws say that the construction would be on 30% of the area and rest should be green area. In that case, the returns drop to 30%, as against 100% suggested by you. Now, 100% was an absurd figure, 30% is more realist and very healthy business returns figure that any investor would be willing to put the money for. Low cost housing is a good arena, provided that 2-4 acre plots are developed within a year, so that consumer financing is more viable and returns improve.
06.17.11 at 12:47 PM
Not really – FSI is typically “built-up” area to ground area, which means you can build more than one floor (even if you build on about 50% of the area – which is more realistic with the setback and green requirements than the 30% you quote. In fact most devs have just 30% green base)
Second, builders charge you on “super built up” area anyhow, which includes greenery. So you pay for the full 80K square feet – the returns mentioned make sense. 100% isn’t absurd but it only will happen if you can sell within a specific time frame and to investors. 100% (or, 50% margins, really) is what even IT companies make!
06.21.11 at 1:07 AM