Tata Housing's low-cost township on the outskirts of Mumbai isn't charity. The company may well have cracked the secret of building such homes profitably
Chances are you don’t know what an ‘exurb’ is. It is hard to understand its meaning until you see Boisar. This is a place 90 km north of the Taj Mahal Hotel in Mumbai. At this place, Tata Housing is putting in place a massive 1,500-home affordable housing project alongside another 1,300 mid-price homes. Once complete, the township would come fitted with schools, shopping centres and a primary health care facility. Amid landscaped gardens, there will be space for children to run and play. The property even has a river running through it. Essentially, the works.
This is an exurb: A suburb of a suburb.
If you think that sounds like a lot to pack in for houses that won’t make a lot of money for the company, you’re going down the right path. At a price of Rs. 4 lakh — Rs. 8 lakh, the affordable homes aren’t very remunerative for a developer. “Developers are rarely interested in this business as there is no top-line,” says Nayan Bheda, chairman of the Neptune Group, a real estate development company.
The surprising thing is that even though Boisar is really far from Mumbai, every single flat in the Tata Housing project is sold out. This has got the CEO of Tata Housing, Brotin Banerjee, to take his plan national. He has launched two affordable housing projects christened Shubha Griha, in Boisar and Vasind (situated 80 km from Mumbai), and has even started a new subsidiary, Smart Value Homes. The company says it is at an advanced stage of tying up land in Bangalore and expects to make announcements for similar projects in Hyderabad and Chennai soon. In all, the company expects to develop 20 million sq. ft. of low-cost homes across the country.
What makes Tata Housing attempt low-cost housing when this segment really isn’t very profitable? Margins in this space are typically half of what they are for other segments. But as Banerjee explains, “We aren’t doing this for charity.” Banerjee believes the company has figured out a way to make the project viable.
Low-Cost Challenge
Unlike other developers, Tata Housing had started to look at affordable housing in 2007 before the slowdown hit. At that time the company was working only on premium housing projects. But data pointed them towards a much larger opportunity at the bottom of the pyramid. (Banerjee also admits that they were afraid a bubble could be building up in some markets.) The company estimated a shortage of 24.7 million units with 70 percent of these being in the affordable housing space.
Ibrahim Sheikh, who owns a garage in Colaba in South Mumbai, is an ideal customer for the company. For the last 20 years, his family has been living in a chawl (tenements with one- or two -room units) in Bandra, a Mumbai suburb. Earning Rs. 15,000 a month, he lived a hand-to-mouth existence. “Who could afford a house in Bombay?” he asks. When he heard of the Tata project through his brother, he rushed to book.
So while there is no disputing the immense opportunity, the challenge for every developer is to come up with a sustainable business model. Affordable housing works very differently from housing for other income groups (see graphic) and so speed of execution is very important here. This is not something most developers are used to.
Bala Venkatachalam, a project manager with the Monitor Group, has worked with developers to understand the problems they face in land acquisition, obtaining clearances and construction. He concludes that the margins and skill sets required make this an attractive proposition for only those with a manufacturing background. Tick the Tatas. The Mahindras are also mulling an entry into this.
Banerjee’s own experience of selling branded salt against commodity salt and at the same price at Tata Chemicals came in handy. The key learning: Low cost means a completely new business model; from sourcing to distribution and from pricing to margins. In much the same way, Banerjee and his managers have questioned every assumption — design, construction, sales, preventing speculative buying and consumer finance — to do this.
So how do you get the prices down? Their own experience and research told them that affordable housing would only succeed if the selling price was no more than Rs. 1,400 – Rs. 1,450 per sq. ft. The team began slashing costs.
Selling the Dream
(This story appears in the 03 June, 2011 issue of Forbes India. To visit our Archives, click here.)