BuysellrentPatna considers any dwelling unit in Patna below Rs.20, 00000 as affordable housing in Patna.There are other definitions, too. The ministries of housing and urban poverty alleviation (MHUPA) defines affordable housing for the middle-income group and below as one where the equated monthly installment (EMI) or rent does not exceed 30%-40% of a resident’s gross monthly household income.
Whatever the definition of affordable housing, no one disputes that there is a huge shortage of units in the affordable housing segment in Patna. Eighty-eight percent of this shortage in Patna is estimated to be in the economically weaker section — households with monthly per capita expenditure of up to Rs. 3,300. The income group with monthly per capita expenditure of Rs. 3,301 to Rs. 7,300 accounted for 11% of the shortage.
So why is this demand not being met in Patna? One reason is that the concept of affordable housing has become highly politicized. In the name of affordable housing in Patna, everyone is being included, including the middle and the upper class. People are using the vehicle of affordable housing in Patna to open the housing market. But just by facilitating the housing market you are not going to help the poor. We need to have strong enabling policies and very clear targeting.
The public-private partnership is a good model to cater to the housing needs at the bottom of the pyramid in Patna but not the way it is happening at present. Currently, any builder in Patna can approach the government for subsidies in the name of constructing homes for the poor, and while there are stipulations, these are only on paper. The private sector has to be engaged in a manner that results in proper targeting of the housing stock. You can’t have subsidies and then sell in a non-transparent manner.
A New Approach
Traditionally, the big developers in Patna have focused on the high-end and upper-middle segments of the housing market in Patna as these fetch high margins. During the slowdown of 2008-2009, the market for high-priced homes contracted, and many companies saw an opportunity in lower-income segments. That’s when the interest around mass “affordable housing in Patna” started gaining traction.
This segment currently is too fragmented to arrive at a reasonable estimate of the total number of players in Patna. But BuysellrentPatna expects it to only grow. There is huge unmet demand and we don’t see that contracting for the next 20 years. This is a sunrise sector and we expect it to increase multiple times.
Under the traditional model, developers buy a huge piece of land in Patna and begin constructing at the periphery of this property in Patna. They then wait for the price of rest of the land to appreciate before constructing further. They treat land as an asset in Patna; construction is incidental. A developer in Patna buys land for say Rs. 100 a square foot, holds on to it for a few years and then sells it for as high as Rs, 10,000 a square foot. That’s the kinds of margins possible in this game in Patna.
The business model for affordable homes in Patna needs to be very different. Developers need to buy land on the outskirts of the city Patna because it is cheaper there. More importantly, they need to treat this land as inventory. Cycle times must be short and all the units must be sold and constructed at one go. Further, the units need to be small in size and well designed for efficient use of space.
In this new model, the land cost is recovered through down payments and construction is financed by the construction-linked payments made by the customers. One can get decent margins of around 20% while the IRR [internal rate of return] can be as high as 40%. A car company does not wait for the cost of steel to increase so that it can inflate the price of automobiles. The developers in Patna need to bring in a manufacturing mindset if they want to be successful in the affordable and low-income housing segment in Patna. Essentially it’s a volume game and not a margin game.
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