When evaluating real estate developers one thing that is critical for me is that their margins are equal to or more than cost of land in % terms. If 30% is cost of land to revnue and margin is lets say 20% then its difficult for me to build conviction about growth prospects.
@bheeshma There are very few companies satisfying this criteria ,I think ashiyana n oberoi. Ashiyana has high margins due to in house sales team bypassing channel margins .I had run some basic screeners 8 months back and only 4-5 companies out of 200+ could quality . Ashiyana, oberoi, suntek, arvind, kolte , ganesh n eldeco n perhaps poddar.this came out close or above filter criteria like margin, debt equity, return on capital , working capital, growth considering average history of 10 years to factor in cyclic behavior
You are right. Few companies would qualify. Those that do are good prospects. Any co with a jv model is also a good prospect because they have to worry only about construction costs. Land is the big headache.
Exactly, you stole my mind wanted to point out this in previous mail but I think apart from Godrej , most of them with JV model ashiyana, arvind etc got covered . Infact , m more inclined to companies with low debt, treat land on P&L side (due to JV),have built a brand based on execution track record n services low to medium ticket size. When opportunity given, they would be in a better position to lap it than the one already in poor stage. We can say repeatetion of what happened in infra from 2004-08 when companies leveraged aggressively and then despite of opportunities , could not take it up even at lower level of competition.Disc : invested in some of names mentioned
By the way , checked with some friends in low ticket size housing loan . As per them, there is huge demand in 5 to 15 lakh segment . No wonder, mutthut, manapuram everyone is trying to tap this market . Would be good analyze what all goes into a 10-20 lakh home n then take it company by company. For now till that clarity does not emerge, m better playing with some of quality low ticket housing players plus low ticket housing finance companies
So, one of the compelling big-picture arguments made goes thus:
IF Affordable Housing has to become the 1.2 trillion opportunity that it is touted as - Construction - HAS to become a very LUCRATIVE opportunity. Without Construction proving lucrative, the houses don’t get built, and if the houses don’t get built, then there is no financing, and no ancillaries selling !!
Now with RERA, the hurdles for small mom n pop builders are too much to cross, so most of that lucrative opportunity will be carried on the shoulders of the big guys, who have the BS and the volumes execution efficiency to create efficient business models from a low margin huge volumes business.
Corollary2: The biggies wont really be needing the LAP financing! LAP is unlikely to be significantly big in Affordable Housing. They say If you want to look at financing - look at the PSU Banks which will start to take the bulk of the Affordable Loans
Very well chalked out Sir!
In my opinion, the chances of PSBs taking on loans is low since the ticket size is generally low and end customers may be from unorganised sector, which I think banks don’t encourage generally. This is where I think we need to understand the bank loan appraisal and disbursement process. For low ticket loans what is the basis of loan allotment, especially to own business applicants.
One of my very immediate and close relative falls into the definition of small or mom and pop developers in NCR Region and let me share you the experience. Since they don’t have much reputation or brand unlike big players in the industry, they first build the project which may be anywhere from a project with 8 to 20 flats per project… So I am talking about very small players… They normally build the entire project through their own money or through partnership… Sometimes loan from banks or money sharks… But most of the time from their own resources because they are able to sell only when buyer see the end product… So what I am saying is ruling the unorganized players completely out of the game is or may not be the right assumption… And now most of the projects will be launched in JV… Organized players will JV the large land parcels while unorganized players will tap small land parcels (1 to 3/4 acres)… Agreed it will be bit more difficult for small developers but they will still remain in the industry
Yes, it is not be prudent to discount the ‘Jugaad’ mindset of Indian Entrepreneurs. They may form JV with small land owners and still provide values to end customers.
I would disagree here. Things worked because all the working capital mess was passed on shoulders of old buyers to feed dream to new buyers. India has more than 27000+ builders (surprising but yes). If RERA is implemented in spirit and the kind of books companies have to maintain, it will throw many out of business. Won’t be surprised if major consolidation happens . Though small, quality and financially prudent players will survive and evolve better. Sio, I don’t think we can wash out small players. It’s more about financial n quality prudence .
@Donald I remember last month reading that reputed developers are not coming forward on affordable projects as financially still it is not making sense to them and AH being modi pet project, he was interested to have a collaborative discussion to look through their issues. May be we should track first how it is progressing do that we get a sense of whether it will pan out or not on a big scale and how it will pan out. Those pointers may help us in right direction .
This is the article I m talking about . Many tier 1 builders are making noise to enter into affordable housing but no one is submitting any proposal
Agreed! But it is not just the money part that is the stumbling block now for small builders (though this is the major one). It’s the bag of legalities in rera that come along with that give big time power to consumers as well. Also, economics of scale i think would not be there with such players.
“Affordable” by definition means “good but cheap”. That is, developers must evolve some way to package a value deal to the consumer at affordable price. Just making it cheap, where value proposition is lacking would result in issues for builders later.
Another aspect we need to consider is the price appreciation of these affordable houses. With so much inventory coming, price appreciation will not be there, so the investment will give no returns over time? Would house buyers think of returns while buying such far from the city houses?
We need to understand, anything that is cheap, cannot come with too many goodies. I feel HFCs with a high specialization in funding affordable sector will derive the benefit. Please have a look at Gruh AR 2017. or please listen to Repco Qtrly concalls. You will get an idea. It is not easy if you want to grow in affordable. They have decades of experiences to fund the same as funding Self-Employed sector is really risky.
Growth in affordable sector will come that segment only and whoever achieved the mastery, will win the game
Disc. Invested in both
Bang on! Now, we need to find out if there are any ways with which builders can bring the costs lower, and can still give value proposition to the buyers. By value proposition, i mean - good construction, decent location (not too far away from the city). With housing coming under infra status, loans would definitely be easier and cheaper, so that’s a big advantage for builders. Second, if the houses are build in bulk (large affordable project), volume may bring in more efficiency and int urn cost savings. Three, to bring down construction cost (per sq ft), material used need to be cheap but good. I was looking at affordable housing industry in Africa. There, they are using different sort of bricks (saw dust bricks and stuff), which are cheaper but more strong than the usual bricks.Builders will probably have to find innovative ways to bring the costs down. Four, land cost being a major portion of the overall project cost, will remain a major issue here.
Not able to upload due to file size but the link provides a PPP framework document for EOI based private sector participation and public feedback on ppp framework . The document highlights key challenges in affordable housing success at desired scale.
Also, the site has state by state status of what’s happening in affordable housing to dig if it is as lucrative as touted by media .I am yet to find the builders behind whatever projects under execution .
By the way , got another doc highlighting 100 plus builders who ve defaulted to noida authority on basic payments. Includes united, amrapali all so called high names. Reminds me of ashiyana housing promoters memoir where the book highlights how he survived by maintaining fiscal prudence at the cost of debt driven quality lacking aggressive growth and stood out when so called real estate growth engines of 2002-08 went for face saving.
So, again revalidates, if affordable housing is a success by volume and by quality, it’s at least the financially prudent but few real estate players who should benefit at level 1 and then we need to decipher .
I am one of those tiny builders, based out of Cochin.
I find that most of my peers are undercapitalized/ are stuck with unsold inventory/stalled projects etc. A sort of fear psychosis is there. One of my consultants is a founder member of the local credai chapter and he did corroborate on the same. Big builders have diversified to other markets, one of the local guys is even expanding to Colombo with an mou from the government there.none of them are entering the sub 60sq m affordable segment yet. I think Kerala may not be a true representation for the country.
We have some projects being put on sale for other builders/partners with capital. I do only one project at a time, and am actually gearing up to do a small premium villas project in a suburban micromarket and I feel that since I am well capitalized and have already purchased the land,I have less competition for a while.
Branding, timely execution and transparency in dealing is the differentiator here even amongst Biggie’s. While smaller players without a marketing budget will have to make do with much lower roe if they are well capitalized.
My thought on the opportunity is the first order the guys who actually execute these works should benefit. Someone like a Nila Infra perhaps ?the company already seems to have some execution demonstrated? And some of their PPP models do seem to give out a heads I win, tails I dont lose much vibe. I also have a huge bias for the efficiency of the Gujarat municipal corporation because of the contrast effect I get from their peers here in Cochin.
Amongst building materials, non premium companies should benefit, like cement perhaps more than sanitary Ware because it’s cheaper to import from China get better looking stuff for cheaper. Something like a plywood( more commodityish).
I find it interesting that PSU banks may capture the affordable housing market. What should I be looking for here ?
Please help refine my thoughts.
Great to know from one who has money in the business. By the way, you are totally right. Among all states , it’s Gujarat leading on execution target on affordable housing followed by Rajasthan as per media reports.
Came across this article. Important points to note:
Home loans up 23%
’<10L up 43% (disbursements for PSBs grew 59% and for HFCs grew by 26%. This is contrary to one of the ideas posted earlier)
’>25L down 1%
HFC has given 14 new licenses last year (known)
10 more companies have filed for license