Imagine living in a city that has six-lane roads, where there are no power outages, there’s proper waste management, you almost walk to work, and there are world-class malls and schools. In a few years from now, you may not have to imagine this; you may get to live in one such ‘city’. Reason: There’s a big scramble to set up integrated townships (ITs) across the country. At last count, there were more than 200 ITs, covering over 200,000 acres, under various stages of approval, planning and construction. Developers see it as a panacea to the ills plaguing large Indian cities—from overcrowding to creaking infrastructure to skyhigh real estate prices.
While some individual developments like the ones in Gurgaon, Mumbai or Bangalore have tackled the issues of power, security, water, recreation etc., those such as commuting and affordability remain unresolved as there have been no efforts towards a wider solution. It is also apparent that state governments do not have the kind of resources needed to reform urban India (never mind the National Urban Renewal Mission)—at least to a level that could be considered world class.
That’s where ITs come in. Conceptually, ITs are meant to be self-sufficient enclaves comprising offices, houses, shops, and recreational activities all within one compound and within a stone’s throw from each other. ITs are also expected to have superior infrastructure network (water, sewerage, power) and support services (education, healthcare, security), all integrated to provide a better quality of life for their inhabitants.
At present, there is no one format that is being adopted by developers, although the key drivers seem to be common: It is either mass housing requirements or demand for commercial space. Therefore, the townships promise to come in all shapes and sizes. The 390-acre Kolkata West International City in West Howrah primarily offers plotted development, while the Mahindra World City in Chennai offers both commercial and residential space (although dwelling units are yet to come up). In fact, Infosys Technologies, which has built a sprawling campus in the Mahindra special economic zone (SEZ), hopes to employ 35,000 people when the facility is fully occupied. Magarpatta City in Pune is built on 400 acres of agricultural land and offers the walk-to-work concept to its residents, and the Dankuni Township near Kolkata is expected to have one of the largest planned developments involving public-private partnership and also cater to the needs of the industrial sector.
It’s not just the white-collar or skilled workers who will gain from the new townships. The BT-DTZ survey indicates that ITs could open up employment avenues for the local semi-skilled and unskilled workers by employing them in maintenance and upkeep of the completed projects. In fact, some ITs projects— like the Alpha International City in Karnal, Haryana—propose to undertake socially responsible projects to help the nearby villages.
Globally, such exclusive townships come in varied forms and are usually built around an economic epicentre. “Industrial Parks or Complexes”, similar to integrated townships, can be seen in China, Singapore and parts of Southeast Asia, primarily arising out of the housing needs of the large number of tertiary workers employed in the tech parks, IT complexes or even SEZs. However, these tend to have more land devoted to industrial use rather than residential. In the US and the UK, this concept is present as “planned mixed use” communities that have been integrating quality infrastructure with a superior selfcontained mixed-use planning.
But before an integrated township can become the promised panacea, it must overcome several hurdles, ranging from a fuzzy regulatory framework to project execution to competitive pricing. BT commissioned DTZ, a global real estate advisory firm, to study the ITs landscape and spotlight challenges for all the stakeholders concerned, including developers, investors, customers, and policy makers. What follows is the result of the BT-DTZ survey, which considered 168 ITs projects, encompassing 127,000 acres.
The Regulatory Challenge
Traditionally, integrated townships have essentially been housing projects offering a combination of row houses, villas, bungalows and group housing—all with essential urban infrastructure and amenities— at differential price points to consumers. Today, townships have evolved to include all the ancillary facilities like commercial premises, hotels, recreational and retail services, along with other amenities. However, there is no standard definition of integrated townships from a regulatory standpoint. And that could be a stumbling block.
At present, different states define integrated townships differently. Gujarat, for instance, has an ITs policy that encourages development of six different types of townships: technology parks, education-based townships, medical and healthcare townships, tourismrelated townships, logistics parks, and residential townships. The policy requires 80 per cent of the built-up area to be developed for residential use, while making housing for economically weaker sections (EWS) mandatory. On the other hand, Maharashtra, which was the first state to come up with an integrated township policy back in 2004, requires such projects to have a minimum spread of 100 acres and favours ITs and provides them preferential land use change, even on agricultural land. Other sops that Maharashtra offers include a 50 per cent waiver on stamp duty and no height restrictions, subject to a floor space index or FSI (also called floor area ratio or FAR in some parts of the country) of 1 across the gross area (see States and Their Policies).
There have been discussions at the Centre about a separate policy on integrated townships, but there has been no significant headway on this except that such a policy has been proposed only for townships that have IT as their commercial epicentre. In the absence of a firm policy at the central level, individual state policies on development and land use will govern the development of such projects. Recent reforms such as the annulment of the Urban Land Ceiling and Regulation Act in some states, modification of the Rent Control Act and rationalisation of property taxes in a few cities and towns have given an impetus to investment but further transparency in real estate dealings is needed to attract greater investment. For example, while allowing 100 per cent foreign direct investment (FDI) in integrated townships has attracted a bevy of global investors, their plans are hobbled by land acquisition, which remains a challenge.
Therefore, the city and state governments need to play the role of enablers. Fortunately for the developers, some states appear sensitive to this need. That partly explains why the biggest ITs projects (townships of above 1,000 acres) are coming up in Tier I cities. For example, Bangalore Metropolitan Regional Development Authority (BMRDA) and Kolkata Metropolitan Development Authority (KMDA) have taken initiatives both at the policy and implementation levels to support private development of townships. Interestingly enough, while there are few ITs projects proposed in south India compared to north India (27 versus 95), they are far bigger on an average. The 27 townships in south will cover 68,048 acres compared to 41,402 acres of the 95 in north.
A Promising Market
What will drive consumers towards integrated townships? The answers lie in the important demographic and economic shifts that are taking place in the country. Growing income levels and changing attitudes towards credit have seen the home loan market grow at a CAGR of around 90 per cent over the last three years, with housing loans outstanding increasing from 2.6 per cent of the GDP in 2003 to 8.2 per cent in 2005. Urban families are getting smaller and fragmented, and that is creating demand for housing in the big cities. The middle class segment (annual income between Rs 2 lakh and Rs 10 lakh, as per the NCAER classification), which comprises just 13 million households, is expected to grow to 128 million households by 2025, and comprise 41 per cent of the population.
The consumerist age bracket of 16 to 64 is gradually increasing (it was 63.5 per cent of the population in 2004), and the ratio of working population to dependent population is also increasing. That is pushing the purchasing capacity farther north. Unsurprisingly, the average age of home loan borrowers has dropped from 42 years in 2002 to 31 years in 2007. The target segment for ITs will, therefore, ideally be professionals between 25 and 45 years from different income levels, but with focus on the middle income group as India’s urban consumer base will be dominated by this income class.
Growing income levels have also led to changes in consumption patterns. People are spending more on education, recreation, healthcare and transportation in a bid to move improve their lifestyles and quality of life. However, cities are getting overcrowded and there’s tremendous strain on basic infrastructure, both of which are resulting in lower quality of life. The more affluent consumers have already reacted favourably to developments that offer modern amenities such as swimming pools, clubs, landscaped gardens, and round-the-clock security and housekeeping. An integrated township that addresses these issues in an affordable manner will have better chances of succeeding in what promises to be a crowded marketplace.
A definition for integrated townships
Broadly, integrated townships can be defined as a planned urban resiDENTIAL development, offering combination of row houses, villas, bungalows, group housing, along with essential urban infrastructure and amenities. Commercial development might also form a small part of the development. The concept has been designed keeping in mind the lifestyle of a specific segment of population (in terms of age, income and profession) and their aspirations. The idea, invariably, is to provide a quality lifestyle that involves good housing facilities with supporting ancillary facilities, commensurate with the location of the development and the consumer profile.
Although there is a lack of any common definition for integrated townships and its constituents, each state government or the respective town planning authority has, in some form or the other, followed the ideal town planning guidelines before giving approvals for such development. Depending on size, a township project is expected to provide certain social infrastructure and ancillary facilities. For example, all townships must provide schools, while the ones above 1000 acres in size must provide a college as well. Similarly, all townships must provide a community room and library, but only the mega townships must offer a recreational club. Ditto, while private security is expected of all townships, a police station is required only of the super-sized townships. Therefore, it would be appropriate to describe any development larger than 1,000 acres as an integrated township as it carries within it the essence of self-sustenance, which differentiates it from conventional developments.
Last, but certainly not least, what will drive consumers towards townships is soaring real estate prices. Although consumers appear willing to pay for ancillary facilities, developers will need to price their dwelling units competitively. A back-of-the-envelope calculation by BT-DTZ suggests that a developer could construct housing units in Tier II and II cities (which have a price elastic demand) at between Rs 2,000 and Rs 2,500 per sq. ft, including the land cost, the cost of construction of the unit, and the amenities (see The Township Economics). Such a development could be aimed at a middle class population that is young and aspires for quality housing.
Opportunities and Risks
There’s little doubt that integrated townships have the potential to transform the urban landscape as we know it today. Yet, with opportunities come risks that need to be mitigated or managed in the near future. How well the stakeholders— comprising developers, investors, consumers, and policy makers— address this interplay will determine the success or failure of ITs projects. Here’s a brief risk-opportunity analysis from the point of view of the four stakeholders:
Customers: If the township projects deliver on their promise, the Indian middle class consumer may witness a new housing and (mass) lifestyle revolution. For that to happen, two things will matter more than anything else: The location of the development and the quality of urban services provided within it. Unless the location is convenient enough, customers may not want to relocate. The quality of services, in turn, will depend on the customer’s ability to appreciate the value of integrated amenities, and his/her willingness to pay for such additional services. In fact, that could well determine the sustainability and success of any ITs project.
Developers: ITs will involve projects that are of large scale and greater complexity, have longer completion timelines and require massive financial commitments from the developers. Therefore, developers will need to demonstrate strong execution skills—not just in project management, but also in financial and marketing management. While all real estate projects carry some amount of political and social risks, township projects will carry political risk of a higher magnitude. Why? Simply because of the complexity of land acquisition and the quantum of investment. But those developers who successfully pull off ITs projects could well become the new leaders in the real estate industry. The rub-on effect will be that they bring about much-needed maturity to the industry practices.
Investors: Those putting money behind ITs have a unique opportunity to take part in a large-scale real estate development, which has residential, commercial and retail components in it and is interlinked with the India growth story. From a risk perspective, the multiplicity of consumers (from individuals to industry to traders) will mean that investors get to hedge their bets better. However, given that there are some pockets around cities where townships are likely to be clustered, investors will need to bet on developers that have thought through their differentiation and target market. Finally, given the diversity of the real estate market in India, investors need to be careful about their entry into and exit from ITs projects. While some marketshave already reached middling levels of maturity in accepting ITs, a lot of others are still waiting to be tapped. Investors would need to understand this diversity and time their investment accordingly.
Policy Makers: The opportunity for policy makers is to create an alternative model of urban expansion in India. Success of the IT model will bring more focus on addressing other related needs of urbanisation such as EWS housing and slum rehabilitation. But policy makers would need to use ITs along with the SEZs coming up all across India. Since all SEZs will require strong residential development, a policy framework that enables robust growth of both the formats could prove beneficial for all. The government has a combination of fiscal and regulatory measures to support and provide incentives for ITs developments. A transparent and fair regulatory environment would help address a lot of the urban concerns today. A few badly executed or unsuccessful ITs projects may be all it takes to turn investors and consumers away from them.
Of course, what underpins the integrated township story is the expectation of continued growth in the economy. The capacity of consumers to invest in real estate and housing are directly linked to the health of the economy. If the economy wobbles, then everything ranging from the growth in middle class families to lifestyle migration to mortgage penetration could take a knock. The good news is that no one’s talking of a major slowdown or recession in the economy at least for now. So, perhaps not 200, but a few dozen townships will see the light of day and give urban living a fresh lease of life.
Abhilash Lal, Priyankar Bhikshu and Samarth Agarwal, led the survey at DTZ.