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August 12, 2010

Low Cost Housing: Opportunity & Challenges

Business Today has an article on the opportunity that is drawing entrepreneurs from across the spectrum.
So, what has made these players, most with no background in the realty or construction business, tap a market that established players have avoided? "The idea of going into this segment was primarily driven by the humongous size of the market. It's a high-volume, low-margin business," says SAS's Batta. Consulting firm Monitor's calculations peg the market for Rs 3-10 lakh homes at a mind-boggling Rs 11 lakh crore with demand running into 21 million. Monitor also believes that corporates can potentially create billion-dollar businesses in the next five to seven years.

...The entrants are not in for a cake walk, though. For one, margins are low, which perhaps explains why most of the established realty players are staying away. SAS expects to squeeze a margin of 15 per cent from micro-housing, compared with 25 per cent from its other projects. Spice Homes, too, anticipates low margins of 10-15 per cent but is counting on quick sales and turnaround to give it a return on investment of over 25 per cent. In comparison, realty biggies who build and sell apartments for Rs 40 lakh and upward have project margins upwards of 50 per cent — but sales cycles can drag on for years.

Two, to keep costs down, most low cost housing projects are located away from the city centre and that comes with its share of issues. Mumbai-based real estate major Marathon Group has its affordable housing project at Badlapur, 68 km north-east of Mumbai. "The construction cost does not vary across locations, but land prices may have a big difference," says Mayur Shah, Managing Director, Marathon Group. "Prices in the periphery could be lower by 10 times compared to city locations." And that's a reality not just in Mumbai. "It's impossible to get cheaper land within (Bangalore) city," says Pramod Kumar, Director of Operations at Value Budget Housing.

Arun Natarajan is the Founder & CEO of Venture Intelligence, the leading provider of data and analysis on private equity, venture capital and M&A deals in India. View free samples of Venture Intelligence newsletters and reports. Email the author at arun@ventureintelligence.in