Affordable housing turns unaffordable…….Anupama Chandrasekaran
The building of low-cost apartments may be booming in India but aspiring buyers often falter in their quest, struggling to put together the funds to make the initial deposit, even as prices keep getting pushed up every six months
The building of low-cost apartments may be booming in India but aspiring buyers often falter in their quest, struggling to put together the funds to make the initial deposit, even as prices keep getting pushed up every six months
Mumbai/Ahmedabad: Most Mumbaikars probably havent heard of Ambivali. Stretched beyond far-flung suburbs like Kalyan, on the Central Railway line, 60 km north-east of Mumbai, it is, quite literally, an outback.
Yet, on a recent, overcast Sunday, every train halting at the Ambivali station dropped off visitors who walked out of the slush-ridden platform to head towards the booking office of Neptune Group, a construction firm selling flats for as low as Rs6 lakhunheard of in Mumbai and its suburbs.
For 33-year-old Jitendra Tukaram Kadam, who booked a one-bedroom unit with an initial payment of nearly Rs55,000, this will be the biggest expense of his life so far.
Ive taken such a risk for the first time, says Kadam, a data entry operator with the Indian unit of US finance company JPMorgan Chase and Co., who earns Rs12,500 a month.
At present, Kadam lives in a tiny chawl tenement with seven family members in Bhandup, located in Mumbais north-eastern tip11 train stops before Ambivali.
Theres no option for us, says Kadam, who wishes he had booked six months earlier when rates were 10% lower. I cannot afford a Rs35 lakh flat, I have no black money stored up, and so I have to be content with moving further away from the city, even if it means waking up an hour earlier to get to work.
Luxury home builders turned to the less cyclical low-income housing after demand for high-priced houses and apartments nosedived during the economic downturn. Over the last year, nearly 25 affordable housing projects have sprung up across India, with Ahmedabad and Mumbai being the hotspots, according to The Monitor Group, a US-based consultancy.
In a July report, Monitor estimated that nearly 21 million low-income urban households can afford homes priced between Rs3 lakh and Rs10 lakh, making this a Rs11 trillion market.
But Mints research shows that these target households, earning Rs7,000-15,000 a month, are often trailing in the race for these apartmentsfirst as they struggle to scrape together their deposit for this big-ticket purchase, then as builders stamp higher price tags on their projects every six months amid spiking demand from other cash-rich buyers and cost overruns from unexpected regulatory delays (see box).
Investor rush
In a place like Mumbai, were quite nervous about rising prices, says Rajnish Dhall of Micro Housing Finance Corp. Ltd (MHFC), a two-year-old mortgage company. MHFC focuses on workers who operate largely cash-based businesses but dont necessarily have salary paperworkautorickshaw drivers and vegetable vendors, for instance.
As MHFCs 12-14% interest loans cannot exceed Rs5 lakh, rising property prices mean low-income buyers have to shell out more money out of their pockets, often ruining their dreams of a home.Clearly incomes are not going up as fast, Dhall says. So we are not able to sanction as many loans.
One reason for the price surge is the investor rush in the budget home space.
A low-income township coming up a dozen kilometres south of Ahmedabad has been completely sold out, partly because businessmen such as A.K. Patel, who lives in a six-room bungalow in Gujarats main city, see it as a lucrative investment.
Over the last few months, Patel bought two apartments at Santosh Associates 418-flat project that is coming up in Vatwa, an area dominated by textile mills and farmland outside Ahmedabad.
Thanks to the demand from people such as Patel, within a year Santosh Associates bumped up the price of a 300 sq. ft one-bedroom flat by 35%, to Rs6.2 lakh.
While investors could be a bane as they push up price tags, analysts say they might be a boon for a business that depends on periodic payments to complete construction and is also being hit by higher costs due to government mandates such as car parking.
Maintaining cash flow
If a developer doesnt get enough end users to buy the flats, then construction will not proceed, says Gulam Zia, national director of Knight Frank India Pvt. Ltd, a property consultancy. Investors help a developer maintain his cash flow, and that is still important.
Still, some builders are holding off speculators. In 2008, the non-profit Michael and Susan Dell Foundation (MSDF) funded a $2 million (Rs9.3 crore) 12-acre plot, 25km from central Bangalore, for Janaadhar Constructions Pvt. Ltd.
But only 15% of the 528 Janaadhar Shubha units, which are likely to be ready by March-April, have been booked thus farlargely because Janaadhar discouraged companies wanting to buy apartments in bulk for their employees as well as software executives looking to buy homes for their parents.
The idea was to give access to the people who are currently priced out, says Janaadhars promoter Ramesh Ramanathan (a former Mint columnist), who has turned down several affluent buyers.
But at some point, if we have to complete our projects and move on, weve got to sell to people who want to buy it, he says.
* Shifting focus: Over the last year, nearly 25 affordable housing projects have sprung up across India, with Ahmedabad and Mumbai being the hotspots, according to a US consultancy. Ramesh Dave/Mint
Budget home builders hit by babudom…….Anupama Chandrasekaran
What lured builders to the low-income housing business was its resistance to downturns from steady and voluminous demand
What lured builders to the low-income housing business was its resistance to downturns from steady and voluminous demand
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 dont 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 Rs.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 flatsdespite 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 Janaadhars 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, VBHCs 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 salariesand most likely the first generation to stay in a flatlargely own two-wheelers. So heres 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.