Mahindra makes a bold bet on affordable homes
It plans to develop projects on a large scale which will help keep costs down; wants to earn higher returns than in conventional realty projects
Jul 09, 2014
Source : Business Standard

 

MUMBAI : The Mahendra group's recent foray into affordable housing is significant for two reasons. For one, it is after a long hiatus that a big business house has ventured into real estate. In the 1990s, many large groups, especially those with land banks in prime locations, had drawn up fancy plans for the sector but quietly retreated when they realised the complexities of the business. (Land is a state subject and so, each market has its own sets of rules and regulations. There are, therefore, no national players in real estate; each builder prefers to operate in a specific market.) Others were deterred by the huge cash transactions in the business - a 2013 survey by Ernst & Young and Federation of Indian Chambers of Commerce and Industry says infrastructure and real estate are perceived as the most corrupt sectors of the Indian economy.

The group's step is significant also because it comes at a time when there is a big question mark over the whole concept of affordable housing. While big builders like DLF and Omaxe have withdrawn from the business after some initial projects, Usha Martin group's realty arm,  is yet to launch three of the four projects it had planned in 2009.

Builders say affordable houses are difficult to execute in cities because of the sky-high real estate prices. They say that land price even in suburban areas like Gurgaon and Noida in Delhi and Navi Mumbai is too high to make affordable housing a viable business proposition. It is suitable only in Tier III and IV cities. Some say that due to the high prices mandated by the even the government will find it difficult to buy land in order to construct affordable houses, unless it throws in a huge subsidy.

Builders point out another problem: taking various clearances can take up to two years; during this time the investment in the land parcel sits idle and adds to the project cost. At Jerry Rao-promoted Value and Budget Housing Corporation, a maker of affordable houses, most of the projects have seen delays in approvals. The company's managing director, P S Jayakumar, says such delays, which can range from six months to three years, push up project costs by 40 per cent. "If we had started two years ago, we would have reached an advanced stage of construction by now," Jayakumar adds. "But when approvals are delayed, the costs ratchet up… this includes everything, from cost of material to cost of capital." Builders also have to contend with corruption. In a market like Gurgaon, the so-called "speed money", or gratification for permits, adds 10-20 per cent to the land cost. And since land accounts for 30 to 50 per cent of the project cost, speed money escalates overall cost by 3-10 per cent.

Adding up the costs

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In spite of these odds, the Mahindra group seems to have responded to Prime Minister  call for homes for all by 2022. It plans to build one- and two-bedroom apartments with floor space of 350-680 square feet. An affordable house is generally one that costs a buyer around Rs 2,000 per square foot, making it possible to own a 500 square feet home for Rs 10 lakh. Construction costs, builders say, come to about Rs 1,600 per square foot; which means, the land cost has to be contained to Rs 400 per square foot. Many builders feel this is next to impossible in the current scenario. The Mahindra group's plan is to approach affordable housing differently. "If we can bring in a manufacturing mindset to the business through execution of project and through real-estate development, we can succeed," Mahindra Group Chairman Anand Mahindra told Business Standard in a recent interview.

"It is a low-margin and high-volume business. We believe this is a game of scale," says Sriram Mahadevan, business head (special projects), Mahindra Lifespace Developers. "So we will launch two pilot projects and based on that, we will scale it up ." Mahindra Lifespace Developers, the realty arm of the Mahindra group, will take up two projects with 2,200 apartments near Mumbai and Chennai. Based on the experience in these projects, it could launch more projects across the country. The company hopes to earn higher returns than in conventional real estate projects.

Mahadevan says the company is doing a lot of value engineering to keep the costs under check. For instance, it has tied up with the Indian Institute of Technology Madras to build foundations which are not only easy to execute but are also cost effective. Mahindra Lifespace also knows that most of the buyers of these homes - priced between Rs 10 lakh and Rs 20 lakh - come from the informal sector and may not get loans easily. That is why the company has tied up with credit scoring agencies like Inventure and micro home finance firms such as Mahindra Finance, Muthoot Fincorp, Micro Housing Finance Corporation and Home First Finance Company.

Challenges galore
The group's top functionaries are aware that they face serious challenges. They believe that speedy approvals and easier development control rules are essential for the company to achieve its targets. The availability of large plots and their costs are other factors. In Mumbai, according to realty consultant Knight Frank, land prices have jumped 35.2 per cent over the past two years.

There are big questions staring affordable housing companies. As HDFC Chairman Deepak Parekh says, "The same approvals are required for low-cost housing and premium housing. Land costs as well as red tape also remain the same for all kinds of housing. There is no encouragement for affordable housing. Why would anybody undertake such projects?" To this, Brotin Banerjee, chief executive and managing director of Tata Housing, adds, "The biggest challenge to affordable housing projects under Rs 20 lakh is the availability of land with well-developed infrastructure followed by timely approvals."

Tata Housing was among the first to get into low-cost housing in 2009 when it launched Shubh Griha project (its price tags vary from Rs 5 lakh to Rs 10 lakh) in Bhoisar on the outskirts of Mumbai. It later carved out a separate company called Smart Value Homes for the project. This company has now been renamed Tata Value Homes. It contributes 30 per cent to Tata Housing's top line .

Jones Lang Lasalle CEO (residential services) Om Ahuja says that since low-cost projects are located off urban hubs, such as Bhoisar or Sriperumbudur near Chennai, these require dependable train services, buses and rapid transport connectivity. "Commuting to their work places is a big issue for most people who plan to buy houses in these projects. If the government wants affordable housing projects to scale up, it has to do something about it," says Ahuja.

Consultants also point out that many developers stay away from affordable housing because profit margins are low. "The margins are 5-10 per cent. Only if we sell 5,000 units at Rs 10 lakh will we earn enough to recover our investment," says a developer in Mumbai who does not want to be quoted. In comparison, the mid-income housing segment offers margins of 20-30 per cent while premium housing earns upwards of 30-35 per cent as profits.

Jayakumar says developers of affordable housing are also facing challenges on the capital front. Given that non-banking finance companies charge between 17 per cent and 21 per cent and debt funds charge 26-32 per cent, it is expensive for constructors to raise funds. "Even foreign direct investment (FDI) is not of any special help to us," says Jayakumar. "For FDI-compliant projects, the minimum threshold is 50,000 square metres. We cannot undertake such large projects." And since taxes are a major concern, Ahuja suggests that the government should reduce the burden of the service tax and VAT on  to provide some incentive to the segment.

The state governments should permit higher floor space index (FSI) in affordable housing projects to make it attractive for developers as well as create mortgage guarantee companies to help small borrowers, says Amit Bhagat, CEO and MD of ASK Property Investment Advisors, a realty fund manager. (FSI means amount of construction permitted on a given piece of land.) "Only if the government comes out with a comprehensive policy on affordable housing such as higher FSI, mortgage guarantee companies and tax breaks will developers come into the sector," says Bhagat. "Otherwise, it will not attract many players." At least for the moment, the Mahindra group has not been deterred by the lack of these incentives in its new foray.

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