The Case For Affordable Housing

Argead defines Affordable Housing as housing that can be purchased by the majority of the population. This is in the price range of Rs 5-12 lacs. Some developers call this " low cost housing" however we believe that this is not low cost but rather a really affordable product.

Most investors are familiar with traditional real estate investments where an investor will purchase land and thereafter take time to get clearances and approvals. During this time period the land value will rise thus making the project highly profitable at the back end. Traditional developers therefore have projects that span decades if not longer.

In Affordable Housing, the goal is to have high inventory turns, i.e. they sell the product quickly. This is accomplished through treating land as working capital and not as an asset. This approach enables us to make the right investment decisions, quickly and move onto to execution. If one views land as inventory, the time it takes to build on it and sell affects its rate of return. Additionally, as one is not selling at a high price there is little or no benefit in the appreciation value of land.

If one compares this approach to that of traditional real estate developers one finds that they pass on the appreciation of land value onto the consumers through higher prices. Thus making the home more expensive for middle class or low income buyers. Furthermore, many of the facilities provided by traditional high end housing developements are not essential or relevant to the affordable housing segment. These additional facets also increase the annual maintenance charges for the home-owner. By cutting down on the amenities and focussing on what is the core requirement for the product to evince interest from buyers one can sell the customer a product at a price point that is affordable to him.

The Opportunity

Argead believes that real estate is a local business and hence we are focussing our energies on Mumbai and Coimbatore where we have well established relationships and local market knowledge.

Argead estimates that the size of the opportunity on a pan India basisis Rs 60,000 crores. Using the NCAER/ NSSO data we calculate that the population of people living in urban slums is approximately 40 million. Assuming 25% of the population is salaried and has affordability of Rs 3 lacs per housing unit. Hence: 40mm people x 25% x 20% penetration x Rs 3 lacs = Rs 60,000 crores

This we believe is the opportunity at the lowest level and hence we have strong belief that there is depth and strength in this market over the long term.