Low-Cost Homes: Why A Viable Business Model Is The Way Forward

Low-Cost Homes: Why A Viable Business Model Is The Way Forward

by Meera Siva - Jul 25, 2018 02:32 PM +05:30 IST
Low-Cost Homes: Why A Viable Business Model Is The Way ForwardA construction site (Wikimedia)
  • Low-cost housing remains a distant dream as small developers face several challenges.

    Here’s how these projects can be made economically viable.

Housing is a basic need and providing a shelter has been a priority for governments – at all levels. But despite technology that reduces construction time and cost and financing programmes aimed at providing funding access to buyers, low-income housing remains a distant dream.

The Need

The huge need in this segment is plainly obvious. There is an estimated shortage of 10-12 million low-income homes, along with 26-37 million urban poor who live in poor quality informal homes, as per the low-income housing finance market 2018 report. The gap is only expected to grow, with increasing urbanisation and the lack of planning for housing.

The demand is not spurring supply as the economics of developing low-income housing is not favourable for developers or anyone working in the for-profit model. Land costs in locations where there are livelihood options are high; licensing process takes very long; and finding financing is not easy for developers.

A recent report by FSG and National Housing Bank shows that only 1 per cent of the housing supply in this segment comes from large and branded developers; and 90 per cent of the supply of low-cost homes is met by small and informal developers.

Ground Reality

Numbers quoted on housing approvals given under Pradhan Mantri Awas Yojana (PMAY) are impressive – over 51 lakh units in urban areas, as of June 2018. The government increased the carpet area for houses eligible under PMAY-Urban by 33 per cent to include middle income buyers as well.

But developers who have taken permits to start projects are waiting it out as they are unsure of the demand and economics. It remains to be seen how many projects will be completed and occupied.

One reason for low interest and success track record is the myriad local issues – politics, land approval and realities such as local goons – that confront a developer. These developers are small and often do not have enough resources, knowledge and network. To succeed and build scale, changes in business model, funding, sales channels, interior design and livelihood management is needed.

New Technologies

That said, what role innovation and technology can play in fixing the woes in this segment, is unclear. Unlike the problem of financial inclusion, technical advances in material, construction methods and marketing channels have not taken off in a big way. Solutions such as using bamboo have not seen traction as buyers prefer a pucca concrete home and mind-set changes take time. While 3D printed homes are built in China, and recently in Netherlands, we may be some years away from such disruptions.

Even in reliable and proven technology, adoption has been slow. The case in point is pre-fabrication technology that has seen good technical improvements and can be used to reduce costs and construction time. For instance, glass fibre reinforced gypsum wall panels technology was modified and improved at IIT Madras to build a full house using panels, and successfully piloted. Researchers constructed an 800 square feet two-bedroom house for under Rs 10 lakh in 2013. But it has not seen mass adoption yet.

Pre-fabrication technology gives better quality at lower cost and reduced time. There are also lean construction practices that reduce inventory and waste. These can save up to 40 per cent of the construction cost. But there are perception issues – builders worry if this will work, buyers are concerned if this is low quality. And in larger projects where tendering is done, the building code needs change to allow using newer technology.

It has not been easy for innovators as well. For one, those in the labs do not understand the practical issues in implementing a low-income housing project or the mind-set of the occupants. Funding has also been tough with venture capitalists not keen on this segment.

Success Stories

While core construction faces challenges, there are some changes in allied segments. One such is a low-cost roof developed by Re-materials, based in Ahmedabad that replaces asbestos, thatched or tarpaulin roofs. The result is reduction in health issues such as breathing problems for the residents. The Modroof is made from recycled material, easy to install compared with concrete roof, durable and costs much less. The buyers get the roof funded by loans from micro-finance companies. The company had raised funding to continue innovations and develop its business.

Other successful models include that of Brick Eagle, which incubates local developers and provides them access to capital, technology, management expertise to help them scale up and deliver affordable homes for the low-income segment. It has delivered 2,000 homes so far and aims to incubate 20 developers in 20 cities by 2020 and deliver one million affordable homes by 2030 – about 5,000 homes per developer per year.

A new accelerator focussed on shelter solutions for low-income people is also in the works. TCIS, an arm of Habitat for Humanity International (a non-profit that works on human shelter solutions) has partnered with The Centre of Innovation Incubation and Entrepreneurship (CIIE) to launch the ShelterTech India Accelerator for early stage companies working to bring shelter solutions for the low-income people.

Policy Changes

Still, to make a significant dent in providing homes for the low income segment, a few policy interventions would help. One would be to consider models such as rental housing, not just ownership. Such models have worked in European countries. In the city of Vienna for example, over 80 per cent of the residents rent and two-thirds of the citizens live in municipal or publicly subsidised housing.

There must also be measures to simplify life for developers. One way would be to help in acquiring land or giving it on lease through a Public Private Partnership (PPP) model. Also, access to lower cost of funds and reducing the development period by offering single-window approvals can also ease the stresses faced in making projects economically viable.

Another option for urban housing is schemes for regularising unauthorised colonies – on government or private lands – through in-situ construction in PPP model.

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