When a banker becomes a builder

The iconic Manoj Kumar movie on poverty and unemployment may be over four decades old, but the subjects it touched upon still hold great significance—food, clothing, and shelter. A lot has happened since 1974, when the movie hit the screens. The country has made great strides economically and socially. But necessities like having one square meal a day or a roof over one’s head are still a challenge for many.

The biggest problem is housing, because it’s also the most expensive. To tackle the problem, the central government has launched an ambitious ‘Housing For All by 2022’ scheme, under the Pradhan Mantri Awas Yojana-Urban (PMAY) programme. The scheme is primarily targeted at the lower-income and middle-income groups of India’s urban areas, which are hardest hit by lack of affordable housing.

As India has grown, its populace has moved to its cities. The 2011 Census, the last one conducted, says roughly over 30% of India’s 1.2 billion populace resides in urban areas. That’s a conservative estimate as the Census has a rather stringent demarcation of urban and rural areas—boundaries which are blurring as India’s cities expand.

Under PMAY, the central government assists urban local bodies, through state/Union Territory governments, in building low-cost houses. The government also provides various tax and duty exemptions to private players involved in slum redevelopment and affordable housing projects.

The government has also given infrastructure status to affordable housing, which, among other benefits, would simplify approval process for these projects. The result has been a surge in affordable housing projects from private players. In fact, in April this year, members of the Confederation of Real Estate Developers’ Associations of India (Credai), a body of private developers in India, announced an investment of Rs 38,000 crore to build over 2 lakh affordable housing units in five states.

“Growing urbanisation and financial inclusion are bringing millions into the formal economy, which is boosting the demand for low-cost homes,” says Satish Magar, president-in-waiting of Credai and managing director of Magarpatta City, which developed over 300 acres of farmland into a township in Pune. Firms such as Ashiana Housing, which ended 2017 with sales of Rs 358 crore, VBHC Value Homes, and Xrbia are optimistic about the future of this sector.

The problem, however, is that many developers entering this space don’t have either the money or the expertise to build low-cost homes. The result, often, is shoddy construction with few takers.

Enter Brick Eagle.

Founded in 2011 by Rajesh Krishnan, its CEO and managing director, Brick Eagle is not your regular builder. Krishnan, a former banker with stints at Lehman Brothers and Standard Chartered, looks at affordable housing differently. “Starting out as another builder wouldn’t have carried me far,” he confesses. Brick Eagle was set up as an incubator for builders. It offers builders capital from investors, and sets up an ecosystem of service providers for construction, advertising, and technology.

It works like this. Brick Eagle selects a willing local builder with a good track record, and typically provides 40% of the capital required, generally around Rs 4 crore. It also takes a stake in the builder and gets veto rights on its board. Brick Eagle also chooses the chief financial officer of the builder firm.

The developer gets a venture toolkit that includes an ERP system, help in project design, construction technology, and promotion. All this comes from companies that Brick Eagle has stakes in, like Hyderabad-based interior designer Foyr or Bengaluru-based IDEINLAB Architects. Funding, which is central to Brick Eagle’s model, is taken care of by Brick Eagle Capital Advisory, led by Kirti Timmanagoudar. So far, the division has raised Rs 400 crore for its projects. Separately, in September, it raised Rs 50 crore each from Bennett Property Holdings and Axis Bank for an alternative investment fund (AIF). The AIF aims to support development of around 50,000 housing units for low-income groups, while targeting 18%-20% annual returns.

It is a complex operation, but the banker in Krishnan is optimistic. In fact, some of his early investors were former colleagues at StanChart.

Brick Eagle today manages over 1,000 acres of land on which 42,500 homes are being built by six developers. The projects are based in nine cities across Maharashtra, Rajasthan, Gujarat, and Tamil Nadu. The units Brick Eagle builds are mostly under 35 sq.m. and priced under Rs 20 lakh. Krishnan aims to deliver 5,000 homes a year across projects.

One of the developers Brick Eagle works with is Pune-based Playtor. Under the partnership, launched in 2015, 1,900 homes worth Rs 200 crore have been constructed. The housing units— as is the norm—are pre-sold, and the revenue is used to cover the rest of the construction cost. So far, Playtor has delivered 300 flats. Its CEO, Sujeet Bhansali, says he plans to deliver 11,000 homes by December 2018.

REAL ESTATE IN India has had a chequered past. Delayed projects have been a long-standing problem. A study published by the Associated Chambers of Commerce & Industry of India (Assocham), in April, found as many as 826 housing projects running behind schedule by an average of 39 months.

Further, only 710 of the 6,83,724 projects sanctioned under PMAY had been completed by early 2016, according to Venkaiah Naidu, then minister of housing, urban development, and urban poverty alleviation, answering a query in the Lok Sabha in May 2016.

Pankaj Kapoor of Liases Foras, a research firm that documents inventory in the sector, highlights the challenges of implementing a low-cost housing project. “Most of them suffer from time overruns. Since these projects are not based on market prices, changes in cost structure affect profitability,” says Kapoor.

Poor record on project completion is only part of the problem. In his reply, Naidu said 2,38,448 houses constructed under the Jawaharlal Nehru National Urban Renewal Mission, and Rajiv Awas Yojana are yet to be occupied. The reasons, he said include “reluctance of slum dwellers/beneficiaries to shift in cases of relocation projects, lack of/incomplete basic infrastructure, and livelihood sources”.

Experts agree. They point out that affordable housing units built far from a city’s commercial area discourage occupancy as the advantage of low cost is negated in the long term by the cost and difficulty of transportation, and lack of employment opportunities nearby.

Then there is the issue of availability of land. Though Brick Eagle has 1,000 acres under it, scaling up would not be easy, as acquisition of land and compensation or resettlement of the previous holders are a challenge.

Also, the Brick Eagle model has too many moving parts, says Anil Sachidanand, managing director and CEO, Aspire Home Finance, the home finance division of Motilal Oswal. “The model relies heavily on getting monies from customers to move ahead with projects. This won’t run smooth all the time as it will be tough to run real estate like consumer goods, even if it is low-cost housing.” The new Real Estate (Regulation and Development) Act, which says developers can only sell ready-to-occupy flats, would also test the model.

Indeed, not all of Krishnan’s bets have worked out well. In 2012, when Krishnan was yet to master the concept of building an ecosystem, Brick Eagle committed an investment worth Rs 200 crore to Mumbai-based Xrbia, which was already involved in lowcost housing. The capital was 300 acres of land under Brick Eagle.

Though the status of this specific deal isn’t clear, Xrbia has since branched out and develops low-cost projects independently, some in locations close to Brick Eagle’s projects. Rahul Nahar, chairman of Xrbia, did not comment on the deal. Nahar, though, claims that Xrbia will soon touch a sales revenue of $1 billion (Rs 6,317 crore) from affordable housing. Fortune India could not verify the claims.

But for now, Krishnan and his investors remain optimistic. Indeed, the model of making use of local builders, creating an ecosystem for them to leverage, and hands-on supervision, is a marked difference from other private equity funds who largely only provide the capital. From an investor’s perspective, there is indeed more transparency and accountability.

Will this model solve India’s housing crisis? Maybe not. But it could be a part of the solution.