Creating affordability in the residential segment has been a well-intentioned quandary that Indian developers have been grappling with for the past decade. With real estate development principles challenged, hard-earned viewpoints have been displaced, and valuable lessons from failures have fuelled numerous success stories in this relatively tough industry.

As with the Indian real estate market, the definition of inexpensive housing varies by city and income level. This is because both the government (under PMAY) and the private sector have hurried to invest in and construct important and innovative products to address one of the world’s largest housing shortages. However, multiple factors must be present for an affordable housing project to achieve stakeholder success requirements. Customers obtaining more room and amenities for less, developers being able to spring communities for high profit margins, and institutional funds making big exits to keep capital churn at bay. A successful affordable housing project is essentially a combination of high sales velocities created by strategically targeting under-represented product niches. IRR-inspiring land purchase, FSI optimisation (often counterintuitive but important), a well-planned procurement approach, and quick execution.

As Steve Jobs once stated, “Get closer than ever to your customers.” So close that you tell them what they need before they realise it themselves.” All of the elements listed above must be combined in the proper proportions to ensure the success of affordable housing developments. It is possible that what the consumer wants does not even exist in the existing market dimension; consequently, it is vital to listen to the customers’ demands without preconceived assumptions. A project in Bhiwandi (on the suburbs of Mumbai) sold 1000 units in 2020 (yep, a complete slam dunk) by targeting an untapped virgin apartment pricing range, causing competitors to drop prices arbitrarily to maintain sales volumes.  However, one aspect that enabled lower-than-market price was not lowering unit sizes, but rather deliberate FSI under-consumption (against typical practice).

Achieving this FSI tipping point reduced exposure to input costs on the majority of counts. Steel prices have risen by 50% today. Lockdowns have resulted in a significant labour shortage. Choosing MLCPs over basements for parking (although sacrificing ground covering) and lowering building heights through FSI optimisation might result in significantly higher profits for the developer despite lower ticket prices for customers and an incremental trade-off on land cost. Fast-selling ventures pay their construction because the inflow of receivables increases as the project grows.

The approach for land acquisition, approval, and financial infusion in the affordable housing context influences the project’s success even more. Lands in inexpensive micro-markets tend to appreciate as infrastructure improves and more families migrate from more established and thus pricier marketplaces. As a result, locking in the price of land now effectively minimises future potential costs. Outright land purchases best serve the mechanism by making staggered payments that level out the risk and return on capital during the approved sanction stage. Exchanging land for a portion of the area to be completed by the developer in the project is likely the maximum price some would pay for land using a finished and supremely priced-in product.

While JDAs can boost project IRRs to new heights, margins suffer, which is why outright purchases can sometimes outperform JDAs in the affordable environment.  For the capital supplier, such an investment usually has a shorter cash cycle.  A significant portion of the land investment can be staggered if win-win negotiation strategies are used with landlords. In the best-case scenario, a significant and ultimate tranche might coincide with the receipt of official sanction. Then, the time between a lengthy land investment and subsequent project launch is reduced to a matter of weeks. The investor’s risk switches from timely clearance to project launch success, which is a better problem to have.  With proper planning and execution, cheap projects can achieve levered IRRs in the early 30s and gross PBT margins in the late teens.

A development’s creatively woven sense of community feel for customers serves as the binding glue that keeps this class of customers loyal to a specific breed of developers, resulting in significant differentiation. The developer’s ability to handle local issues on and around the site, take a hard look at construction costs, and constantly course-correct while enabling multiple avenues for making home loans and CLSS available to customers (many of whom have income instability) are also critical in resolving the difficult but immensely rewarding conundrum of affordable housing.