After initial enthusiasm, developers shy away from affordable housing
Ashok Shaw 08 September 2010

The global recession had prompted developers to foray into the affordable housing segment. But low margins and the subsequent economic recovery has made the industry shift its focus to high-end projects

During the recession, developers were gung-ho over 'affordable housing' projects, with plans for low-cost housing sprouting faster than mushrooms after a cloudburst.

But as soon as there were signs of the global economy recovering, the focus promptly shifted to the luxury segment, with plans to meet the housing needs of the low- and middle-income groups being put on the backburner.

Pankaj Kapoor, founder and managing director, Liases Foras, a real-estate rating and research company, told Moneylife, "It was a seasonal gimmick played by all the developers. In 2008, there was a scenario where luxury was in fashion. Developers were making high-end flats but they were not finding buyers and soon they found themselves with acute shortage of money and a surfeit of debt traps. All builders then went gaga over affordable housing; but that has also faded over time. In less than six months, everybody changed their plans and moved to the luxury segment."

The affordable housing segment was in vogue when the global meltdown put a question mark on the real estate sector worldwide. As the effects of global recession sneaked into India in 2008 - creating uncertainties over jobs in the country - people became cautious about spending, and were reluctant to invest large sums in buying homes. The situation was exacerbated by falling investor confidence, and from their peak levels in 2007, real estate prices came crashing down by 30%-40% during 2009 and many premium houses could not be sold. At this time, affordable housing was all the rage.

Unitech Ltd was the first to take the affordable housing plunge. Sandeep Reddy, former analyst with Kotak Institutional Equities and co-founder of GrOffr.com, a real estate website for group buying, said, "Unitech was the first to employ the strategy of lowering the unit size and reducing the price, resulting in creation of the 'affordable' segment. Most developers followed suit."

For example, Unitech had initially launched "Grande" as an ultra-luxury residential project in Noida, but re-launched it with a major portion converted into smaller flats available at discounted rates.

However, almost all developers followed the herd, right from Tata Housing to Delhi-based Omaxe, but some failed to stick to their plans.

In September 2009, Hiranandani Constructions had announced plans to launch its first mid-income housing project by the year-end. However, though Hiranandani had mentioned at that time that the launches would depend on getting approvals from the government and other authorities, the plans have remained on paper.

In November 2009, another developer, DLF, was said to be planning to build one lakh affordable houses that would cost less than Rs20 lakh in major cities across the country. Nine months later, DLF has said that it might withdraw from the affordable housing sector due to low margins under the scheme, according to media reports. 

The company, at that time, had reported a 25% rise in net debt to Rs18,463 crore. A DLF official, however, refused to comment, citing lack of information. Incidentally, in May this year, DLF was said to be planning to launch a high-end housing project in Lower Parel (central Mumbai), according to reports.

Though developers are staying away from the affordable segment, the demand for such housing continues to rise. According to the Planning Commission, the urban housing shortage in March 2007 was about 24.71 million units and is estimated to increase to 26.5 million by 2012. About 99% of this shortfall is in housing for economically weaker sections and low-income groups.

Approximately 42.8 million persons (15.2% of India's urban population) live in slums with inadequate sanitary and drinking water facilities. The proportion of population living in slums is even higher in metropolitan cities. Though the state government has taken steps like the Maharashtra Housing & Area Development Authority (MHADA) schemes and various Slum Rehabilitation Schemes, the plans have been plagued with controversy.

This means that private players need to play a bigger role to meet the housing needs of billions of people in the low- and middle-income groups. According to Mr Reddy, developers need to change their mindset to a 'manufacturing' one if they want to tap the affordable housing segment. "Today developers focus on maximising profit. They need to change that to a factory or manufacturing mindset considering the profit margin on affordable housing sector is low. Besides, delay in completing affordable housing projects would mean losses. Hence, complying with requirements of manufacturing can lead to the success of these projects," Mr Reddy told Moneylife.

However, Mr Kapoor is hopeful that developers would soon turn to the affordable housing segment. He said, "Sooner or later, developers have to come back to the affordable segment."

Comments
Kannan.K.V.
1 decade ago
What I see here is an opportunity for some serious player to enter this affordable housing segment and exploit it to the fullest. Different strokes for different folks, so ,why crib that builders have gone back to luxury segment?
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