The affordable housing conundrum

It remains a peculiar conundrum. India needs 5 million affordable homes every year. And, the supply is not even 500,000 homes a year. Given the sheer unmet demand, India presents the largest, multi-billion affordable housing opportunity in the world. You would assume that there ought to be a stampede of big developers, established corporate houses, and some of the country’s canniest entrepreneurs to grab the proverbial pot of gold at the end of the rainbow.

Yet surprisingly, the landscape is littered with failed attempts — and a visible lack of ambition. So what’s prevented India’s mega corporate houses, the Tata group and the Mahindra Group, or former banker-turned-entrepreneur Jaithirth Rao’s Value and Budget Housing Corporation (VBHC) from coming up with the goods? And, with 78 million homeless Indians, why is Prime Minister Narendra Modi’s grand Housing for All plan unlikely to even come close to achieving its stated goal by 2022?

Based on my conversations with various stakeholders, it appears that the affordable housing opportunity has proven to be one more of the many “wicked problems” that afflict India. At least three countries — China, Mexico, and Thailand — have solved the affordable housing at scale. In India, till date, while there have been a few courageous attempts, there is still no largescale business model in place.

Here are the many hypotheses on the state of play: One, most of the large developers are focused on building fancy gated enclaves for the rich and the upper middle class, and who couldn’t be bothered with the modest 15 per cent rate of return that low-cost housing provides. Two, India has many micro-markets even within a few kilometres in a city — and evolving a standardised product can prove to be a disaster. Gauging the exact nature of the demand has proven to be tricky. Three, managing the marketing and sales effort in a low-margin, high-volume sector, without any automation, makes it doubly challenging. Four, it hasn’t helped that the tenor of government policy has, for most part, been misdirected. For instance, offering subsidies to low-income consumers simply makes no sense. After all, the problem isn’t around demand generation, but about ensuring that the supply side is fixed. Five, there are 20,000-odd local, unknown entrepreneurs, who operate on the fringes of the housing market, catering to this demand for low-cost housing. Collectively, they account for almost 90 per cent of the supply of affordable homes a year. They have two of the three key success factors required for this business: The frugal mindset and an ability to manage the local environment. What they don’t have is the ability to source pools of low-cost capital and a strong governance framework.

While large conglomerates such as Tata Housing or even Mahindra don’t have capital constraints, they seem to lack the frugal mindset needed to succeed. I remember a conversation with the redoubtable Dr C K Prahalad, where he narrated just how difficult it was for him to work with the Indian Hotels team to design and build Ginger, their budget hotel brand. He blamed it on the overhang of being luxury hotel owners.

So what can India do to solve this challenge? Should it continue waiting for Big Business to step up and fill the void? Should it funnel more low-cost capital by making affordable housing a part of the priority-sector loans? Should it encourage market-based solutions to emerge, where new platforms seek to serve the small, unbranded real estate entrepreneurs and help them scale?

Of this, the last bit is perhaps the most interesting. I recently met Rajesh Krishnan, the Wharton-educated banker-turned-founder of Brickeagle, which calls itself an affordable housing champion. Their attempt is two-fold. One, to cherry-pick the smart local real estate entrepreneurs and provide them with access to low-cost capital, sourced from impact investors, and the attendant transparency and governance standards. And two, stitch together a supporting eco-system of service providers in the low-cost housing value chain, by investing and incubating in firms in areas such as low-cost construction technology, interior design, sales back office, etc. that help the portfolio firms handle the inherent scale and complexity.

Brickeagle’s attempt to build its own ecosystem for affordable housing is commendable. But in the end, unless the government approval process is streamlined, incessant delays can play havoc with margins. There is need for greater transparency and governance in public-private partnerships so that it helps avoid the same mistakes that have recently come to the surface in Mexico, thanks partly to a major The Los Angeles Timesinvestigation. There, starting way back in 2001, the government had embarked on an equally ambitious housing-for-all agenda — but eventually lost the script, resulting in social and financial catastrophe.

India needs to urgently solve its affordable housing crisis. And, its smart entrepreneurs are best placed to solve it, if the government supports them, instead of engaging with big builders, who are focussed entirely on premium housing.