The Affordable Housing Puzzle: Three pilot projects in India aim to assemble the pieces –customers, financing and scale

11.25.2015
 
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Affordable housing has been one of the most debated development issues over the last decade. That’s great because the numbers show it’s the most important factor to facilitate rural-urban migration and overall development. Developing democracies like India are urbanizing at a furious pace; over the next 16 years about 250 million people are expected to move from villages to cities in India alone. This is a huge opportunity to increase productivity and the standard of living, a phenomenon likely to be repeated in other developing countries across South America and Africa. Along with food, health care and education, housing remains the most basic of requirements.
Creating quality housing that is reasonably priced, sized and easy to access (in terms of location) has become more of a challenge than an opportunity. The main problem noted by virtually everyone who studies it is the extraordinary rise in land prices over the last decade, coupled with the construction boom that skyrocketed the cost of building materials and labour rates. But if we dig deeper, a number of other systemic problems emerge, including:
  • Approvals: The development rules for new building are archaic and ambiguous at the best of times and this leads to rent-seeking opportunities. Added to this are the huge delays in getting permissions and liaisoning with multiple departments. At last count – in the city of Rajkot where our pilot project is based (more on this below) – over 30 separate permissions were required. This is a systemic risk in most countries, but much more so in developing countries.
  • A flawed business model: The business model for housing development has become seriously flawed over the last decade. Developers have an incentive not to sell and build in the shortest time. I’ve observed instances in India, Sri Lanka and multiple countries in Africa, in which property prices have risen by nearly 50 percent in less than a year.
  • Overstressed balance sheets: Most developers work on the land banking model, and usually the money meant for construction is siphoned off to acquire more land, leaving ongoing projects stranded. This dynamic has become the norm rather than the exception in India among the leading builders.
A number of studies (Monitor Deloitte, KPMG, McKinsey Global Institute, Indian School of Business, Institute of Financial Management and Research, to name just a few) have concluded that construction technology at a micro level is the bottleneck. Meanwhile, a large amount of philanthropic and seed capital has been deployed to address this issue. While they may be well-intended, many of these initiatives are based on a misguided premise. Building with “local” materials and unskilled labor is simply not viable to achieve real impact.
 
First, clear land titles and basic infrastructure need to be in place to even address the problem of construction, and without scale, creating infrastructure is not viable. Clearly, people moving into permanent structures don’t want to deal with mud or bamboo walls – they want to move away from slums and temporary structures where those materials are commonplace. Studies have shown across the world that they aspire to conventional brick and mortar or concrete structures. The key is to build fast, to scale and efficiently find funding for these buyers, and to get the cash flows in place.