NextBillion - An Initiative of the William Davidson Institute at the University of Michigan

Wednesday, May 6, 2015

Affordable and mid-income housing is a beast like no other. It has a business model that bears little similarity to traditional real estate where developers often rely on price appreciation. Here, the margins are a lot lower, and builders must construct township-like projects quickly. A delay can wipe out profits, while buyers don’t have the ability to pay EMIs if projects are held up. Despite these challenges, three companies—Ashiana Housing, Poddar Developers and Value Budget Housing Corporation (VBHC)—have decided to focus on this segment.

PS Jayakumar, managing director of VBHC, which operates in Bangalore, Mumbai, Chennai and the National Capital Region, sees affordable housing as a social requirement, one that offers builders the opportunity to develop high-quality projects. Poddar Developers entered the business five years ago, and relies on its strong brand recall for its properties in the Mumbai Metropolitan Region, says MD Rohit Poddar. For Varun Gupta, whole-time director, Ashiana Housing, infrastructure deficit is a key challenge.
Excerpts from a discussion on what it takes to succeed in the business:

Q. What made you decide to enter the affordable housing market?
PS Jayakumar: Jerry Rao (chairman of VBHC) had sold Mphasis (a Bangalore-based IT services company now owned by Hewlett-Packard), and he wanted to start a new venture. He researched various businesses and then looked at the affordable housing segment which caters to the bottom of the pyramid. This was in 2008; there was a lot of optimism. That’s the context for our entry into the sector. Apart from being a scalable business, affordable housing is a social requirement. There is also a lot of scope for mechanisation, and it offers an opportunity to build really high-quality housing. The difference in price points arises from the size, the location and, to some extent, the construction process.

Q. What was the thought behind getting into a business when the land aggregation model was at its peak?
Varun Gupta: Our company has been in business since the 1970s. People got into the land aggregation model because that’s the story the bankers sold: If you buy so much land, this is the valuation you will get and so on. We still avoid land aggregation as that business model did not make sense to us. If land appreciation is the only thing that will create value then why have an organisation that builds houses? Our idea is always to be a customer-centric company.

Q. How did you justify the business case?
Jayakumar: Our business case was fairly straightforward. The margins were going to be small, about 15 to 20 percent of sale price, even lower at times. Our whole business approach is to turn over the asset very quickly. The return on equity [RoE] from that perspective will be a good 20 to 25 percent, similar to any other manufacturing operation. [This is unlike traditional developers who often have 40 to 50 percent margins.] We see it as a purely manufacturing consumer products kind of business, which will be supported through quick turnover and low margins, but justifiable on the strength of being able to rotate the capital many times over, thereby giving a good RoE.