2020 was an extraordinary year by any measure. It was a year of a global pandemic aglobal recession and unprecedented government actions. It was a year in which each of usfaced difficult personal challenges and a staggering number of us lost loved ones. It wasalso a year when those among us with less were disproportionately hurt by joblessness andpoverty. And it was a time when companies discovered what they really were and sometimeswhat they might become.
As I started thinking about this year's annual letter I thought I'd take thisopportunity and forum to shine light on the affordable housing segment and how despite therecent policy effort by the government - it had not yet achieved its true potential. Thestudy that we conducted over a period of 12-18 months highlights some critical structuralissues that needs to be remedied for the segment to punch above its weight. It is an areathat we continue to garner our expertise on and build out our core capabilities in.
The concept of affordable housing in itself is not new: there has always been a feltneed to provide high-quality for-sale housing to the underserved. According to a reporturban cities are likely to house 40% of the Indian population by 2030 with an estimated590 million people living in those cities. For a country of our scale and size the demandfor housing will perpetually sustain. The reason it has only now come into the forefrontis two-fold: firstly the central government has made it lucrative for the private sectorto participate through various demand-side interventions and policy support; and secondlysoftness in demand in luxury residential real-estate has forced developers to look fornewer growth avenues.
It is very clear that the opportunity set in front of us is big and has only grown overthe past few years. Despite that we have not seen developers been able to successfullymake a sustainable business case out of it. This is not as much about the lack of a marketopportunity inasmuch it is about executing it correctly within a certain framework.According to our on-ground research developments usually go off-track due to thefollowing reasons:
A. Location: As with any other real-estate development location is the key and themost important starting point. Developers often chose land parcels situated very far awayfrom the city-centre without an adequate social and trunk infrastructure in a bid to lowertheir land acquisition costs. It is critical to place these developments in peri-urbanareas with established transportation linkages and built-in infrastructure. Low-incomeresidents invariably provide a higher weightage in their decision-making process to directcommuter access via public transportation to the city and the availability of nearbyamenities like schools and hospitals .
B. Land: It is important to pursue a value-accretive land acquisition strategy whileensuring a disciplined capital structure to achieve appropriate risk-adjusted returns.Developers should focus on acquiring land parcels of certain select sizes - between 4-6acres - which can be completed in 1-2 phases and have a typical completion timeline of 4-5years. Local developers have often faced challenges in developing township-like projectsas it necessitates a build-out of the entire internal/external hard infrastructure likeapproach roads electricity lines drainage etc. which adds significantly to the projecttimeline/costs. It also requires a certain level of project management and executionexperience to successfully deliver them in a budgeted manner.
C. Project Inventory: Affordable housing projects are often low-rise G+4/6 structuresthat are simpler and faster to construct. A developer can extract added value out of theproject by having a maniacal focus on running a manufacturing-like operation withstandardized structures units with little/no personalized modifications and streamlinedprocesses/control functions to accelerate the project timelines.
D. Capital Stack: Residential real estate development has gradually over time becomemuch more capital intensive due to an evolving regulatory environment with the launch ofthe Real Estate (Regulation and Development) Act (RERA) in 2016 and a shift in customerpreference towards ready-to-move-in properties. The conflux of these has expeditedconsolidation in the market thereby crowding-out weaker developers and ensuring that onlythose who have the financial wherewithal to support a project through to its completioncan survive.
As an industry real-estate is a heavily localized industry which requiresboots-on-the-ground. Thus it is no surprise that we have seen the emergence of very fewnational pan-India real-estate developers in the past decade. Housing demand is often metby local developers who have extensive experience in dealing with (1) landowners bytapping into their relationships; (2) local regulatory body in procuring approvalspromptly; (3) labour contractors and procurement vendors/suppliers who are oftencity-specific; and (4) customer segments in micro-markets that have different specificityand characteristics. This has created a market that is heavily fragmented with a total of10 developers in India accounting for only 11% of the overall supply.
To remedy the problem the focus must be on creating a handful of local champions ineach of cities. Various stakeholders need to work in tandem to create a conduciveecosystem for the sector to thrive. We need a coordinated policy effort from thecentral/state government through a more targeted supply-side intervention that willencourage greater private sector participation. The real estate developers need to provetheir mettle by demonstrating they can achieve best-inclass corporate governance andbuilt-in controls. Financial intermediaries must channel the flow of institutional capitalinto the sector at appropriate terms. The confluence of the above is likely to ensure thatthe sector can achieve its true potential.
From this letter I hope shareholders and all readers gain an appreciation for the taskat hand and what we must do as a responsible corporate citizen in helping this countryachieve its potential.Finally I sincerely hope that all of us will be able to move beyondthis unprecedented pandemic and look forward to a brighter future in the months to comeahead.
Kedar Nath Fatehpuria
Chairman & Managing Director.