India's next mega market

You don't need to know anything about real estate to see that it is big business. perhaps the biggest business there is. But it was only recently that India Inc. realised that housing for people with low income is a large, untapped, and very profitable market. Do the numbers and you can see for yourself: the market for houses costing Rs 3-10 lakh is worth some Rs 11 lakh crore with an unserved demand of 21 million households (each, on an average, costing Rs 5.25 lakh). This is bigger than the traditional higherend housing market (houses costing Rs 25 lakh and above) or the "affordable housing" market (Rs 10 to 25 lakh).

Add to that the potential to transform the quality of life of 100 million Indians, and you are talking about a huge opportunity to create both commercial and social impact. That impact is best realised by several entrepreneurs and corporates building a successful sustainable business. The challenges, though, are many:

• This is not traditional real estate, but a highvolume business and hence requires the strategic vision and operational excellence typically exhibited by manufacturing companies.
• Little is known about the characteristics of potential low income customers: ignorance about their behaviour patterns and choices has left them classified as poor risk and unimportant customer segments.
• Housing and real estate in India is still highly "government-interactive". Acquiring land, getting project approvals and "managing" local authorities are all integral parts of a complicated process. And most corporates and individuals who have built businesses independent of government involvement or favour find it difficult to handle this process.

No one ever said that developing a new Rs 11 lakh crore market was going to be easy; it took microfinance 30 years to develop into a robust sector, software took 20 years of constant plodding before it burst into the global limelight, and telecom took 10 years. But with a demand for tens of millions of houses for low income customers, and numerous corporates, entrepreneurs and allied businesses entering the sector, it is clear that the next "mega market" could well be low income housing.

With a market this big, it is clearly possible for a corporate to build a billion-dollar business in the next five to seven years . but this will require innovation, collaboration, continuous improvement, customer understanding and above all, the will to make a difference in the lives of our working millions.

Innovation, Ecosystem the Keys
This business requires the best of all worlds . an ability to design and deliver a quality product at volumes, run a business at scale, deal with government at multiple levels, and sell to a new customer segment. So, while companies may start with existing business techniques and practices, the key is innovation in design, execution, operations, marketing and financing.

At the end of the day, low income housing is inherently a different business model . the "land-as-inventory" mindset, rather than the traditional "land-as-an-asset" model, wherein the developer buys a piece of land, and builds some housing, that, in turn, raises the value of the remaining land. The key then is to build in phases and sell at rising price points as the price of the land appreciates . in other words, construction is just a "side business" to add value to the land.

The low income housing model, on the other hand, encourages developers to think of land as inventory . buy well-connected land parcels with social infrastructure such as schools and markets there as required, construct houses on them and sell them off as soon as possible. Here the value is derived from developing a quality product and delivering volumes. This model is aimed at managing the end price for a customer with limited affordability and unrecorded credit history. And to ensure continuous affordability, the key will be to innovate to manage prices - just like the consumer durables industry has done for decades.

The ecosystem is another key - without it, low income housing will be just an idea. Along with the supply of housing, it is imperative that there are housing finance companies that lend to this customer segment. That there is access to construction technologies to help build homes faster and cheaper, and there are funders and sponsors who can provide patient capital for consumer education, thinking around maintenance, rental housing and prevention of vertical slums. As these apparently discrete elements integrate, they will create the foundation for low income housing to grow.

The business of low-income housing has a 20-30 per cent margin and a 35-50 per cent IRR (internal rate of return) on a conservative estimate. While these margins may not seem attractive to traditional high-end real estate developers, they make inherent business sense for corporates who are used to tighter margins and tough customer markets. And the sheer volume-driven nature of the business allows a business house to build a profitable billiondollar business in five to seven years.

Social Profits
However, the true impact of this sector is not purely economic; it has the rare distinction of straddling two worlds - social and business. Millions of families earning between Rs 8,000 and 25,000 a month require houses - and houses that will give them access to a quality of life they can only dream of now, allowing their children to grow up in good, safe neighbourhoods. If Indian companies can deliver these volumes, they will help transform the lives of millions and create a more equitable society, and change the way the world thinks about the power of business to deliver true double bottomline benefits at scale.

And if transforming the lives of tens of millions of individuals is not enough, it also has enormous implications for the economy. The construction industry is the largest employer in the country and the low income housing market is larger and more labour intensive than conventional housing. And with these jobs will come the multiplier effect. This market will also have a systemic impact on urban development by providing an alternative to slums and poorly planned low income neighbourhoods. It will also complement the work being done by the government (without any need for subsidy), and provide a quality and cost benchmark for slum rehabilitation.

Thanks to the promise of this commercial and social impact, it is clear that the low income housing industry is scaling up in India and the rest of the ecosystem will soon grow alongside it. As big players such as the Tatas build their presence in the space, and new entrants with promise of scale - such as Jerry Rao's Value Budget Housing Company and Ashish Singh's Spice Homes - begin operations, it's only a matter of time before India sees its first few billion-dollar companies emerge in this market.

- Ashish Karamchandani is a Partner/Monitor Group