Affordable, but at what cost?

His candour is refreshing—but then in times like these, it pays not to beat around the bush. “Yes, we’ve had to eat humble pie,” admits Sanjay Chandra, Managing Director, Unitech, when asked about the shift in his company’s focus from doing only premium housing projects to chanting the affordable housing mantra. “I think we overestimated the demand of the premium segment and were possibly wrong in reading the size of the market,” he adds.

Chandra isn’t the only one banking on affordable housing— realty’s new buzzword for survival. Developers across the country, regardless of their size, are following the herd, buffing up necessity to the point of virtue. Consumers and industry watchers are obviously happy, but are surprised that it took over a year for developers to realise that sustenance lay in the affordable housing segment.

“The error that builders committed was in miscalculating the demand-supply economics. For example, if out of 100 potential consumers, demand for the premium segment was for 10 units, they were supplying 30 while in the affordable segment, against a demand of say 50 units, supply was limited to 20 units,” explains Anuj Puri, Chairman and Country Head, Jones Lang LaSalle Meghraj.

Developers, though, apportion the blame on the booming economy for being swept away in the glitter of the premium segment. “It was the expectation of the incremental increase in the standards of living that prompted real estate developers to ignore the affordable housing segment,” says Chandra.

Getting down a notch Smaller apartment sizes: A standard 2 BHK apartment, which offered 1,200 sq. ft of built-up area, now comes in 900 sq. ft Non-prime locations: Apartments and houses where land valuations are still low (read as Tier II cities of remote suburbs of Tier I cities) Reducing profit margins: Compared to the affordable segment, profit margin in premium segment is 100-150 per cent higher Chop the frills: Out goes that indoor swimming pool, Italian marble flooring, etc.

So, what led to the change? The liquidity crunch that had stalled several upcoming residential and commercial projects across the country is by now well-documented. This is what forced developers to change from being accumulators of land banks to using the land as a bank to bail out of the financial crisis that threatened the very net worth of their companies. “The focus today is on liquidity rather than valuations as companies are starved of operating cash flows,” says Chandra, who is now also offering plotted developments.

Additionally, the measures announced by the government —special interest rates for sub-Rs 10 lakh and sub-Rs 20 lakh home loans—also played their part in finally convincing real estate developers about the direction of the wind. A marginal part—to the extent of 15 per cent—was also played by the lower input costs of steel and cement. Another reason that forced a change in strategy was the realisation that developers were competing against themselves in many cases. As Chandra says: “Our premium segment was catering to the second home buyers, who started offloading their acquisitions after the slump, affecting sales of our new launches.”

Others have now wisened up to this fact. Unitech’s arch rival, DLF has factored in this consumer behaviour into its new launches. “We have a compulsory lock-in period of one year for any new buyer besides allotting one apartment on one PAN card to ensure that only genuine end-users buy our properties,” says Rajeev Talwar, Executive Director, DLF Group.

However, buyers still may feel shortchanged. The flurry of the Rs 20-30 lakh category houses is not without caveats. “What developers have done is to reduce the ticket size and their margins. So, a two-bedroom apartment, which was earlier sized at around 1,100-1,200 square feet, will now be smaller at 850-900 square feet,” points out Rohtas Goel, Chairman & Managing Director, OMAXE.

Margins, too, are 20-25 per cent lower in the affordable housing segment vis-à-vis the premium category housing but that, say developers, is more than made up by the sheer volumes generated by the affordable housing segment.

Which is why those like Unitech are planning a 70 per cent product portfolio mix skewed towards affordable housing for all their future projects. “Even in the existing premium housing projects, there will be a mix of affordable apartments to cater to specific demographics,” points out Chandra, alluding to Unitech’s Grande in Noida and Uniworld City in Greater Noida, near Delhi.

There is, of course, another factor that buyers will need to keep in mind when opting for houses under the affordable tag: many of these are either in Tier II towns or on the outskirts of the satellite towns of Tier I cities. It’s a point being driven home by OMAXE, which has launched such projects under its Panache Home brand in Delhi NCR at a starting price of Rs 15 lakh for two-bedroom apartments. The homes are located in Noida, Faridabad and Ludhiana. “By and large, affordable housing will be limited to suburbs of Tier I cities or Tier II towns,” says Goel, whose firm has recently launched OMAXE City Homes in Indore, offering apartments in the range of Rs 6 lakh-15 lakh.

Who’s doing what and where DLF Project: DLF Capital Greens Location: Shivaji Marg, Delhi Ticket size: 2 BHK (1,200 sq. ft) and 3 BHK (1,525 sq. ft) Offer price: Rs 4,500 and Rs 5,500 per sq. ft (depending on location) Unitech Project:Ananda Location: Perambur, Chennai Ticket size: 1 BHK (622 sq. ft); 2 BHK (967 sq. ft) and 3 BHK (1,338 sq. ft) Offer price: Rs 3,000 per sq. ft Omaxe Project: Panache Homes Location: Greater Noida, Delhi NCR Ticket size: 1 BHK (650 sq. ft) and 2 BHK (800 sq. ft) Offer price: Rs 2,650 per sq. ft (unfurnished) and Rs 3,250 per sq. ft (furnished) Lodha developers Project: Casa Bella Location: Dombivali East, Kalyan Shil Road, Mumbai Ticket size: 1 BHK (580-650 sq. ft); 2 BHK (740-1,030 sq. ft) and 3 BHK (1,098-1,557 sq. ft) Offer price: Rs 2,043 per sq. ft Indiabulls Real Estate Project: Centrum Park Location: Sector 103, Gurgaon, Delhi NCR Ticket size: 2 BHK (1,029-1,136 sq. ft); 3 BHK (1,344-1,393 sq. ft); 4 BHK (1,979 sq. ft) and Penthouse (2,071-3,758 sq. ft) Offer price: Rs 1,950 per sq. ft (apartment) and Rs 2,350 per sq. ft (penthouse)

It’s apparent that most developers won’t be able to offer affordable houses in the heart of a Tier I city and if they do so, the location and the ambience will leave a lot to be desired. The best example is that of DLF’s recent launch, the DLF Capital Greens on Shivaji Marg in Delhi—located in an industrial area and in close proximity to the Najafgarh drain. “Yes, there will have to be a trade-off between affordability and proximity to work place in most cases,” says Abhisheck Lodha, Director, Lodha Group, which has launched Lodha Casa Bella in Mumbai’s Dombivali suburb at a starting price of Rs 12.82 lakh for a one-bedroom unit, going upto Rs 28.58 lakh for a three-bedroom apartment. Unitech, too, is targeting sub-Rs 10 lakh category homes, aimed at blue collar workers around Gurgaon.

All said and done, getting into the affordable housing segment seems to be a sound business decision if one were to believe the developers. It does, however, leave one question unanswered: why wasn’t the real estate industry quite as proactive in catering to this demand at the start of the last fiscal when all economic signs pointed to a slowdown?

“It would have been better if we had got into this segment last year to get a first mover advantage. Now there’s too much competition,” admits Goel. Disruptive pricing, quite obviously then, will be the name of the game in the segment. A case in point is Unitech’s SRP in Mumbai’s Dadar area, where against the market rate of Rs 14,000 per square feet, it sold apartments at Rs 10,000 per square feet.

Such varied pricing also proves that ‘affordability’ is a relative term depending on the location. “While a Rs 50 lakh apartment in Mumbai will definitely be considered part of the affordable housing segment, in a city like Indore, the same price segment will qualify for premium housing,” points out Ajoy Veer Kapoor, Founder & Managing Director, Saffron Asset Advisors, a private equity firm specialising in real estate investments.

Kapoor, while keeping track of the slew of announcements in the affordable housing market, is not that thrilled at the potential size of the business. “Valuations need to become more realistic, which could take another 4-6 months. There are still some players who have a fixed valuation of their assets and refuse to understand the changed market dynamics,” he laments.

So, will banking solely on the affordability segment, bail out developers from the current crisis? A recent report by brokerage firm Motilal Oswal suggests that it may not be so due to the low margins in this segment. Besides, given that most realty companies have restructured their debt repayment obligations beyond 2-3 years indicates that they do not expect any surplus cash flows from past sales. “Affordable housing will become an intrinsic part of every real estate developer’s business plan, but there will be demand for premium housing also,” feels Lodha, whose ‘by invitation only’ project, the Lodha Bellissimo in Mumbai’s Mahalaxmi area, will offer super-luxury apartments spread across 48 floors. While most such projects are currently in cold storage, the question is, just who’s going to accept the ‘invitation’?

Sanjay Chandra, Managing Director, Unitech Unitech’s lifeline The $325-million (Rs 1,625 crore) qualified institutional placement (QIP) of troubled real estate major, Unitech, has brought back the smile on Managing Director Sanjay Chandra’s face. Managed by UBS and IDFC-SSKI, the issue was subscribed by Nomura, HSBC, Helios, Prudential, Sandstone, Sansar, Sloane Robinson, Government of Singapore, Och-Ziff, Oasis and CLSA, among others. Of the total amount, $20 million was raised from domestic funds. This shot-in-the-arm will help Unitech in addressing its debt servicing, which had increased from Rs 8,552 crore as on March 31, 2008, to Rs 10,907 crore by December 31, 2008. The current outstanding debt—as on March 31, 2009—was Rs 8,900 crore, of which Rs 2,500 crore is payable this financial year. The money coming in will be pumped into the affordable housing segment, where Unitech is planning to launch 40 projects in 2009-10, aggregating 30 million square feet.