Developers don't find affordable homes 'affordable'

During the slowdown of 2008 and 2009, many big and not-so-big property developers had caught on to the 'affordable' phenomenon like never before. Realtors including DLF, Unitech, Tata Housing, Omaxe, Puravankara and Usha Martin, had all rushed to announce their foray into value or affordable homes to generate cashflows and volumes.

The race for affordable projects was almost heady. In 2009, DLF, the country's largest developer, said it wanted to build two to three million square feet or 100,000 homes under Rs 20 lakh bracket in major cities.

The same year, Unitech, the then second largest and now the third largest realtor, announced that it planned to construct 20,000 affordable houses at a cost of Rs 1,700 crore (Rs 17 billion) to become the country's biggest realty company within a year.

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A year before that, Omaxe, another Delhi-based real estate player, said it wanted to build one million affordable homes between Rs 3 lakh and Rs 15 lakh under its Rs 80,000 crore (Rs 800 billion) project.

Cut to the current slowdown. While DLF and Omaxe have withdrawn from affordable housing after doing some initial projects, Usha Martin group's realty arm Usha Breco Realty is yet to launch three of the four projects it planned to build in 2009.

Though, Unitech is still into affordable housing projects under the 'Unihomes' brand, it has sold over 4,000 units across cities in the last three years. It plans to sell more than 1,500 units in the same category this year as well, a company spokesman said.

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Affordable housing which had caught the fancy of developers during 2008 is no more a favourite. Just one or two new players, including Mahindras, are entering the segment at a time when sales in key property markets such as Mumbai Metropolitan Region (MMR) and National Capital Region (NCR) are almost half of what they were last year.

Even numbers culled by realty research firm PropEquity suggest developers are losing interest in this segment. The number of unit launches, which are priced under Rs 20 lakh and considered affordable in outskirts of metros, has come down by a whopping 91 per cent in NCR between 2009 and 2012 and 57 per cent in MMR.

Even Bangalore, Chennai and Hyderabad, the other key residential markets, the launch of apartments priced less than Rs 15 lakh have seen a drop of 58 per cent, 80 per cent and 73 per cent respectively.

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Interestingly, the data also show that in most cities the sale of such homes has come down, too, justifying developers' lack of enthusiasm.

In NCR, the absorption has come down by 72 per cent in 2012 compared to the 2009 numbers. In MMR, the absorption has come down 42 per cent between the two periods.

"In 2009, there was a downturn in global economy... but now prices have gone up and it does not make business sense to launch such projects. Such projects can be done in tier-III and tier-IV towns, but they are not viable anymore," said Rajeev Talwar, executive director at DLF.

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Laden with Rs 22,680 crore (Rs 226.8 billion) debt, DLF is selling its non-core assets such as hotels, wind energy, land parcels besides selling plots to generate cashflows and cut its debt.

Says Brotin Banerjee, managing director and chief executive of Tata Housing: "A lot has changed since the 2008-09 slowdown, due to the increasing cost of cement and steel coupled with the hike in the land cost... The fashion (of announcing affordable housing) has faded off and only serious players with long-term vision for affordable housing and those who know how to run the business viably have continued in the segment."

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Even as Tata Housing was among the first ones to launch the low cost housing project Shubh Griha in Bhoisar on Mumbai outskirts in 2009, it later carved out a separate company Smart Value Homes Limited (SVHL) to do low cost housing Shubh Griha and affordable housing under 'New Haven' brand. The parent, Tata Housing, stuck to doing premium and luxury housing.

A few months ago, SVHL launched a low-cost housing project in Ahmedabad, followed by a mid-range affordable housing project 'New Haven Compact' earlier in the month in the same city where apartments were priced at Rs 12.9 lakh each. Gulam Zia, national director, research & advisory services at Knight Frank India, says developers could not find this segment viable as they used the same resources meant for premium housing.

"You cannot shift engineers and architects doing projects where the construction cost is Rs 7,000-Rs 8,000 per sq ft to projects where the cost is Rs 1,200 a sq ft. The engineer who normally does not bother about a few hundred rupees will be at a loss to understand the dynamics of low-cost housing where every rupee is important," adds Zia.

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Also, while many developers had launched apartments under Rs 10 lakh bracket, they have raised the prices due to an increase in costs.

For instance, Jerry Rao-promoted Value and Budget Housing launched its project Vaibhava in Bangalore at base price of Rs 4.5 lakh to Rs 10 lakh for 354 sq ft apartment to 640 sq ft flat in 2010. Today, the price for a 351 sq ft studio apartment stands at Rs 9.1 lakh and goes up to Rs 23.98 lakh, according to a call centre executive at the project.

P S Jayakumar, managing director of VBHC, insisted the company is still offering apartments at as low as Rs 7.7 lakh in the Bangalore project, and plans to offer some apartments at Rs 6.5 lakh to Rs 7 lakh range in the upcoming projects in Mumbai.

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"Between August 2010 and today, input prices of key raw materials have moved up significantly. Cement price has moved up 60 per cent and steel prices have doubled," he said. "Unless approval times are substantially reduced, there will be continued pressure to deliver apartments at less than Rs 10 lakh," he added.

VBHC plans to launch six projects in the country this year which includes two projects in MMR, two in NCR and one each in Bangalore and Chennai.

"In places such as Bangalore, it takes 17 approvals before the launch of the project and seven more after it. If you take 15 months in getting approvals, the effective cost of the land goes up 50 per cent which puts pressure on the company and buyers," VBHC chairman Jerry Rao told Business Standard recently.

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"Raw material prices have gone up so high that it is not feasible to remain in the sub-Rs 10 lakh segment now. We are launching new projects between Rs 15 lakh and Rs 24 lakh in Pune, Hyderabad and Nagpur," said Uday Dharmadhikari, chief executive officer, Usha Breco Realty told Business Standard last year.

Margins in the affordable segment are believed to be between 15 and 20 per cent as against 30-40 per cent in the premium category.

"Today, not many are doing affordable projects because costs are constantly going up. If you do such projects, costs will eat into all their margins," says Akshit Shah, research analyst with SBICAP Securities.

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But there are some contrarians around. For example, Bangalore Puravankara Projects, through its affordable housing arm Provident Housing, plans to launch six projects of around 11 million sq ft by the third quarter of this financial year.

"We have seen good sales in our affordable housing projects in Bangalore and Chennai. That's why we are launching new projects," said Ashish Puravankara, joint MD, Puravankara Projects.