Build out from the bottom rung

A multibillion-rupee opportunity awaits construction firms and developers in India who can build affordable homes for those now condemned to live in slums.

The Monitor Group calculates that addressing the housing needs of just one group of low-income earners will bring 6 trillion rupees in new construction spending.

The real opportunity for business lies at the bottom of the consumer pyramid, in the sale of goods and services to the poorest households. That is the claim of C K Prahlad, the professor of business administration at the University of Michigan. Even as India's top consumer companies, such as Hindustan Lever, Godrej and ITC have heeded his advice and have made a fortune selling shampoo, detergents and cooking oil to the poor in affordable sachets, Prof Prahlad's logic is only now dawning on those who can satisfy the ultimate consumer dream: a home of one's own. The government's planning commission estimates India's unmet housing demand to be almost 25 million homes, with most being for middle and low income groups. Industry analysts place the figure closer to 40 million. The Monitor Group, a management consultancy founded by Michael Porter, the Harvard Business School professor, calculates that the 23 million urban dwellers who earn an annual income between 60,000 rupees (Dh4,551) and 132,000 rupees represent the bottom rung of the market for affordable housing. The challenge is how to profitably meet their demand. Several small projects by small local builders, especially in Gujarat, have been built and sold. But it is only in recent years as the market for premium housing slumped that big construction groups have begun to appreciate the business opportunity available among the poorer residents. Tata Housing, the development arm of the Tata conglomerate, for example, is building a complex of 1,200 apartments at Boisar, on the outskirts of Mumbai, where units measuring between 283 square feet and 465 sq ft each will sell for between 390,000 rupees and 670,000 rupees. These are planned to be ready for occupation in 2011. The key to making housing affordable lies in controlling the cost of land, which can constitute anything between 25 per cent and 50 per cent of the selling price of an apartment. Consequently, most low-cost or affordable housing projects have been planned far from the city centre and involve long and costly commutes. "If land is made available to the urban poor, they can build their own homes with minimal financial support," says M Nagarajiah, a slum redevelopment activist with the Association for Voluntary Action and Services (AVAS) in ­Bangalore. AVAS advocates "in situ" housing solutions, where slum dwellers are encouraged to rebuild their existing shanties, many in the very heart of the city, into proper houses. The slum clearance board has a scheme to help build 265 sq ft dwellings that include a hall, kitchen and toilet for 110,000 rupees. A grant from the federal government's urban renewal fund meets 90 per cent of the cost. AVAS has built 12 dwellings under this scheme in slums across Bangalore as demonstration units to show the government what ordinary people can achieve given the right ­incentives. "Our priority is that livelihoods should not be disturbed; that the vendors, artisans and construction workers continue to live in their communities, send their children to local schools and continue to ply their trade," Mr Nagarajiah says. Affordable housing may involve a bare-bones approach to planning but it can be very profitable. Milestone Group in Mumbai is one of the first private equity funds in India to realise the potential of the affordable housing market, and is looking to finance construction of apartments costing between 800,000 and 2 million rupees each. The buyer of an apartment costing 800,000 rupees would earn about 12,000 rupees a month and spend 40 per cent of his salary on rent. Slum dwellers in India's metros typically spend as much as 50 per cent of their earnings on housing. If they were willing instead to pay this sum as a monthly loan instalment, they could borrow 640,000 rupees, or 80 per cent of the value of a flat. The key is to limit the land cost to about 200 rupees a sq ft, says P G Ganapathy, Milestone's director of projects. Mr Ganapathy believes an affordable home of good quality measuring 500 sq ft can be built for 800,000 rupees, or a price of 1,600 rupees a sq ft. The single biggest cost element would be construction. Adding marketing and sales expenses, financing and transaction costs and registration and stamp duty charges, a builder could make a healthy 33 per cent return a year. Girish Puravankara, the managing director of LG Constructions in Bangalore, a luxury home builder agrees that affordable housing can be profitable. "It need not be just an afterthought when the premium market collapses," Mr Puravankara says. But he believes locating such projects on inaccessible sites on the city's outskirts makes little sense. "The key to affordability lies in good design and consequently smaller apartments, not poor location," he says. Land prices in India's cities are among the highest in the world, however, and that is an issue that must be addressed. "Land cost is purely a function of infrastructure and demand," says Anshuman Magazine, the managing director of the property consultancy CB ­Richard Ellis in New Delhi. "Accessibility and good utility support can make plenty of land available to the housing market. India has plenty of land available. Creating transport infrastructure, besides providing sufficient power, water and supporting infrastructure, is the prime responsibility of the government, not building cheap houses." And it is better planning, not technological fixes, that help control building costs. Where labour is cheap, the only real savings to be had is time, Mr Ganapathy says. "It is here in design and planning that we can make the maximum savings." He lists a number of measures that can reduce construction costs. They are to avoid building basements; pay close heed to keeping levelling, filling and excavation costs to the absolute minimum; avoid swampy or waterlogged soils that require piling or rafting to control foundation costs; provide only one emergency lift for an entire building, as each lift adds 100 rupees a sq ft to the price of an apartment; avoid curved facades; plan infrastructure to optimise road, power and sewerage networks; avoid concealed wiring and plumbing; and use natural stone for flooring instead of ceramic tiles. The real challenge, Mr Ganapathy says, is balancing people's aspirations with what is strictly necessary to ensure structural integrity, reliability and resilience. The Monitor Group calculates that addressing the housing needs of just the lowest income section in their sample (between 6,000 rupees and 11,000 rupees a year) will have a tremendous economic effect, bringing 6 trillion rupees in new construction spending. Thus, by creating affordable housing on a mass scale, India can both meet the basic needs of its poorest and give a powerful stimulus to its economy. [e-mail]