Real estate analysts and developers in Patna believe that if the government takes the initiative to remove the roadblocks, as discussed in an earlier article on this Blog, the affordable housing segment in Patna could move to the fast track. Realtors in Patna say that if infrastructure is developed outside the city limits, then the market forces will make sure steady supply. And within the city limits of Patna, granting of more floor space index (FSI – the ratio between the built-up area and the plot area) can spur the real estate sector in Patna. The principal issue is that government polices come in the way of affordable housing in Patna. If land is available easily and the approvals process is speeded up, the rest of the issues can be managed by the builders and developers in Patna and the demand supply mechanism of real estate market in Patna.

Builders in Patna on their side need to think big. Someone has to have a vision of building a million homes in and around Patna in 10 years. Real estate in Patna needs to believe that it is possible to have a profitable proposition in affordable housing in Patna. The only thing required is the project and cost management to be very strong. Builders in Patna should invest substantially in technology that helps speed up construction.

To keep the costs low the builders and developers in Patna should look for economies of scale and developing a standard product. They need to use a lot of construction related technological innovations and specific design strategies, including adequate lighting and ventilation and optimal use of materials. It will help them to meet economies of scale and keep costs under control. Vendor management is another area that can help builders in Patna; they can tie up with long-term supply contractors for steel, cement, tiles and other materials used in the real estate business.

Affordable housing projects in Patna provide for low-risk, reasonable-return opportunities in Patna. Due to huge latent demand, salability is not an issue for such projects in Patna. While margins are lower in affordable housing in Patna than in luxury projects, investment returns in terms of IRR are attractive due to faster sales velocity. This is a segment which balances the risk-return profile of any fund’s portfolio. Affordability is based on income levels of the residents in the catchment’s area.

BuysellrentPatna does not expect a rush of private equity players to enter affordable hosing space in Patna in the near future. Structurally speaking, there are normally three entities in any development in real estate sector — the land owner, the developer and the PE fund. The project should be able to create value for all three players. With the present land costs, lack of government support and a limit on sales realization, there is not enough value created for the PE fund. The second issue is scale. Affordable projects in Patna are viable if the scale is large. For example, 800 to 1,000 units make a critical mass. However, scale also means increased complexity in execution, which can erode the already thin margins. Pointing out that affordable housing is more susceptible to cost overruns, which in turn can make the projects unviable the PE players need to proactively take part in monitoring the development of such projects in Patna ensuring cost control and project timelines. If done so, this segment provides attractive investment opportunities especially considering the risk return spectrum. But BuysellrentPatna doubts the interest PE funds would exhibit for affordable housing in Patna in near future.

So what is the way ahead for affordable housing in Patna? We think affordable housing in Patna is a financially viable proposition. There is so much demand that as long as the pricing is good, real estate companies in Patna are bound to sell at a healthy absorption rate. But for this to happen, all stakeholders need to have a common vision and work toward it.

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