ISB_AffHou_Rep

CEMS Report April 2012
New Frontiers in
Affordable Housing:
Notes from the Field
Supported by

April 2012
Authors:
Dhaval Monani
Nikhilesh Sinha
Bhargavi TM
Shahen Dastur
Swapnil Lodha
Roopali Raghavan

About CEMS:
The Centre for Emerging Markets Solutions (CEMS) is an
inter-disciplinary applied research centre at the Indian School
of Business (ISB) which investigates issues of economic
development and inclusive growth. CEMS has been set up
with the conviction that market-based solutions exist for a
large number of the developing world’s problems, as long as
new products and services are developed, proof-of-concept
demonstrated, and capital made available from a variety
of sources. CEMS takes a systems approach to economic
development and focuses on six interrelated foundational
elements: Small business and Finance; Affordable Housing
and Urbanization; Education and Employability; Healthcare;
Energy; and Philanthropy.
table of contents
Introduction 01
Executive Summary 03
Section 1: Setting the Context 05
Section 2: The Rajkot Pilot Affordable Housing Project 15
Section 3: Insights into Affordable Housing in Peri-Urban Areas 21
Section 4: Rental Housing 31
Section 5: Facilitating Private Affordable Housing in Peri-Urban Areas 39
Conclusion 45
References 48
Appendix 1: Choice of Technology 53

Mankind is urbanizing. Fast. For millennia, the vast
majority of people lived in rural areas, but the 20th
century saw a dramatic growth in urban population, and
in 2008, this population crossed the 50% threshold for
the first time. Current models and projections predict
that the world will be close to 70% urban by 2050.
Introduction
in the last 10 years. India today has 53 cities with a
population of over 1 million, which is small compared to
China, but is still fairly significant.
According to several recent reports, anywhere between
250 to 300 million people will migrate to Indian cities
in the next 20-25 years. Effectively, that would mean
an urban population of between 550 to 600 million
people.As per capita urban capital expenditure goes up
from about $17 to $150, over 70% of all new jobs will
be created in urban areas, which in turn will encourage
more migration and greater urbanization.
One of the biggest challenges posed by rapid
urbanization is the provision of decent and affordable
housing for urban dwellers.This is a major issue facing
India and several other emerging markets, and one that
is a key area of focus for CEMS and for ISB. In order
to find market-based solutions that work, theoretical
research is not enough.We found it essential to work
with entrepreneurs in order to design workable
solutions.This report includes in-depth research we have
conducted over the last three years. More importantly
it contains insights we have drawn from partnering with
the developers behind the lowest cost formal housing
available in the market.
In 1900, there were about 14 cities globally with a
population of over a million.Today, there are over 400.
India has not escaped the urban explosion of the 20th
century, in spite of a pronounced political bias towards
rural areas.According to the latest census numbers,
close to 100 million people migrated to urban areas
Data source: United Nations Population Division, (2008)
World Urban Population (Per cent)
PercentageUrban
Year
80
70
60
50
40
30
20
10
0
1950 1975 2007 2025 2050
Data source: Census of India 2011, United States Census 2010, China Census 2010
Cities of over a Million
180
160
140
120
100
80
60
40
20
0
53 49
170
India USA China
01

The complexity of the housing problem in India means
that no single solution is likely to work.While the state
has instituted a number of programmes to address the
housing shortfall, there is a significant role that the
private sector can play in the creation of affordable
housing.This report locates the potential for private
sector engagement in affordable housing in peri-urban
areas near industrial agglomerations. Such industrial
clusters tend to attract migrant labour from nearby
towns and villages.As a result, the low cost of land
for construction is met with an effective demand for
affordable housing projects. Further, the absence of
social infrastructure is off-set by connectivity to larger
urban centres. Having identified this potential, the
Centre for Emerging Markets Solutions and the Indian
School of Business participated as knowledge partners
in a pilot affordable housing project in Rajkot, Gujarat.
This report examines the Rajkot business model and
the lessons learnt from the experience. It also proposes
for-profit rental housing models in such peri-urban
locations.
executive
summary
03
Though the housing models discussed in this report
are viable in themselves (even in the absence of state
subsidy), a targeted set of policy interventions could
help increase access. In areas witnessing industrial
growth, especially those areas which are on the cusp
of the urban-rural classification divide, restrictive
norms on the use and sale of agricultural land present
a serious obstacle to housing initiatives. Simple changes
to the existing regulatory framework have been
proposed in this report in order to address this issue.
In addition to enhancing land availability, provisioning
for infrastructural facilities in peri-urban areas is also
a significant challenge. Innovative programs under the
RajivAwasYojana and the strategic use of town planning
initiatives could go a long way to address this concern.

Setting the
Context
Section 01

Setting
the Context
The Anatomy of the Housing
Shortfall in India
In 2007, the urban housing shortfall in India was
24.7 million units. Of that, about 22 million units or
approximately 90 per cent of the shortfall was housing
for the EconomicallyWeaker Section (MHUPA –
Working Group on Urban Housing, 2007-2012).
This shortfall was unevenly distributed amongst the
different Indian states.While Maharashtra, the state with
the highest urban population, had the highest shortfall -
roughly 3.72 million houses -Tamil Nadu had the next
highest (2.82 million), followed by Uttar Pradesh,West
Bengal andAndhra Pradesh (MHUPA – Estimation
of Shortage, 2007-2012).With a combined deficit of
almost 13 million houses, these five states accounted for
more than 50 per cent of the shortfall.
Government Efforts to Curb Housing
Shortfall
While there has been a shift in the role of the
government over the years, from that of a provider
towards that of an enabler, housing has continued to
command the attention of policy makers. Government
interventions have largely taken one of the following
forms: construction of houses for employees of the
government and for poorer sections of society, schemes
that provide loans to individuals to construct their
houses and policies dedicated to slum clearance and
improvements. Unfortunately, these initiatives have not
succeeded in reining in the growing housing shortfall.
In 2008-2009, the Fourteenth Lok Sabha Standing
Committee on Urban Development reviewed the
impact of a number of government schemes launched
in the past decade.The Sab Ke Liye Awas Programme1
aimed to construct 133,704 houses in urban areas in the
target year of 2007-2008, but managed a mere 28,599.
TheTwo Million Housing Programme2
, a loan based
scheme with particular stress on the EWS and the LIG,
aimed at facilitating the construction of two million
additional dwelling units during each programme year.
Data source: MHUPA – Working Group on Urban Housing, 2007-2012.
Figure 1.1: Urban Housing Shortage in Mn. (2007)
30
25
20
15
10
5
0
21.78
24.71
2.89
0.04
EWS LIG MIG & HIG Total
1. The Sab Ke Liye Awas programme was launched in 2006 as a part of the
Twenty Point Programme.
2. The Two Million Housing Programme was launched under the umbrella of the
National Housing and Habitat Policy of 1998.
Table 1.1: Classification Of Households By Income Group
Income Group Monthly Household
Income (INR)
EWS (Economically Weaker Section) Less than 3,300
LIG (Lower Income Group) 3,300-7,500
MIG (Middle Income Group) 7,500-14,000
HIG (Higher Income Group) More than 14,000
Among other targets, it required the Housing and Urban
Development Corporation (HUDCO) to provide loans
for the construction of two million dwelling units in
urban areas in the years 2002-2007. However, only
1,330,271 loans were sanctioned (MHUPA, 2007-
2012). In the year 2007-2008, HUDCO was to provide
loans for the construction of four hundred thousand
dwelling units in urban areas.The Standing Committee
noted, however, that by September 2007 loans had
been disbursed for the construction of only 19,406
dwelling units. In addition to such programmes, home
loans have also been disbursed by housing finance
companies (HFCs) regulated by the National Housing
Bank. Notably, in the years 2002-2005, only 0.2 per
cent of the housing loans financed by such HFCs were
of value less than INR 50,000; and only about 7 per
cent of the loans were of value between INR 50,000 and
INR 100,000 (MHUPA, 2007-2012).As loans of lower
values target the EWS and the LIG, these figures are
indicative of the proportion of loans disbursed to these
income segments.
The successful implementation of housing policies
requires close and effective coordination between the
central and state governments, especially as land is a
state subject - a major lacuna identified by the report
of the Standing Committee. Further, housing assistance
focused on individual loans leave the poorest of the
poor out of their scope. Financing the purchase of land
for the house tends to be excluded from the ambit of
3. The design flaw of various subsidies is highlighted by the fact that, in order to
meet their eligibility criteria, the targeted population is often dependent on some
form of bridge financing from another source (Mitlin, 2003).
4. The slum clearance scheme introduced during the Second Five Year Plan,
the Scheme for Environmental Improvement of Urban Slums, the Valmiki
Ambedkar Awas Yojana, the Basic Services for the Urban Poor programme and
the Integrated Housing and Slum Development Programme are examples of such
policies. (Compiled from various Government of India sources) The Rajiv Awas
Yojana, introduced in 2009 as a comprehensive policy on housing, also makes
slums its priority. As an improvement on its predecessor programmes, it allows
for incremental housing and greater flexibility on the methodology to be adopted
for redevelopment of slums (MHUPA, 2011a).
the loan, as is any form of incremental construction of
the house3
(Rao, 1979; Mitlin, 2003).As a result, loan
disbursement targets in the EWS/LIG category are
rarely met.
A number of policies have attempted to tackle the issue
of slum redevelopment4
. Government outlook has
progressed from the response of demolishing slums,
without providing rehabilitation to slum dwellers, to the
current programmes that emphasize the need for in situ
development.The programmes, however, have not been
very effective for a variety of reasons. Slums are often
situated on land owned by central or state government
agencies. Prior to upgradation, redevelopment and/
or grant of tenure security to the residents, the slum
rehabilitation authority needs to arrive at a negotiated
settlement with these government agencies regarding
the compensation that they are to receive for their
land – a time consuming and complicated process.
Redevelopment is often financed by granting additional
floor space index (FSI) to private builders in exchange
for constructing apartments for slum dwellers.The
viability of such programmes is, therefore, dependent
on the price differential between (i) the sale price
of additional apartments built through the grant of
FSI, and (ii) the cost of construction of apartments
and providing temporary shelter for slum residents.
When redevelopment is no longer viable, builders
tend to withdraw from the project. Further, lack of
transparency and exclusion of eligible slum dwellers
has been a common grievance during implementation
The successful implementation of
housing policies requires close and
effective coordination between the
central and state governments,
especially as land is a state subject.
06 07

of redevelopment schemes5
.As a result, there is a
strong perception amongst the intended beneficiaries
that the schemes are skewed towards developers.
Redevelopment plans, therefore, are met with a
great deal of resistance (Burra, 2005; Patel &
Arputham, 2008).
Private Affordable Housing Has Not
Catered to the EWS/LIG Segment
According to current definitions of affordable housing,
affordability is calculated by looking at the required
monthly expenditure on housing as a proportion of
monthly household income - the guidelines varying
between about 30 and 40 per cent (Mckinsey, 2010;
KPMG, 2010; ParekhTaskforce, 2008). For instance, for
a house to be affordable to a family earning INR 7,000,
the rent or the monthly instalment on a loan must be
no more than INR 2,100 or INR 2,800, respectively.
The definitions also mandate the ideal size of affordable
housing units.The ParekhTaskforce (2008) concluded
that affordable housing should consist of units between
300 to 600 square feet in area.While some others have
accepted this stipulation (KPMG, 2010), McKinsey and
Company suggest that the units should come in a variety
of sizes, with the minimum being 275 square feet of
carpet area (McKinsey, 2010).The rationale behind
curtailing unit size is that smaller units would cost less.
Additionally, they would be attractive primarily to low
income households.
In 2010, KPMG projected that demand for affordable
housing would drive growth in the Indian real estate
sector.They estimated that the three bottom segments of
the market (EWS, LIG and MIG) represented a market
worth INR 7.5 trillion.The inference was that economic
growth and rapid urbanization had contributed to a
new urban class of home seekers with increased income
levels.
Concurrently, developers who had been hurt by the
2008 credit crunch and locked land markets were
increasingly beginning to look at affordable housing as
a way of getting out of the economic slump.According
to Monitor (2010), cities such as Ahmedabad, Chennai,
and Mumbai, which had some developers providing
for low income housing (LIH) in 2006-2007, saw the
number of developers more than double. In addition,
Pune, Nagpur, Bhiwandi and Bawal had developers
spring up where there had once been none.The report
noted that a new mix of developers, both large and
small developers, as well as corporate players, were
now involved in LIH.The larger developers were also
considering producing high volumes of affordable
housing. Further, developers were placing an emphasis
on innovation in order to provide customers with lower
prices and increased quality.
Despite these positive signs, a survey, conducted by the
Centre for Emerging Markets Solutions (CEMS)6
in
the same year that Monitor and KPMG published their
reports, revealed that a majority of‘affordable’ housing
projects are only in fact affordable for households in the
MIG and HIG category. Of the 38 projects surveyed,
not a single one was within reach of the EWS segment.
Further, it was found that only three of the projects
were likely to benefit the LIG segment. 45 per cent
or nearly half of these projects were only affordable to
households with monthly incomes above INR 14,000.
5. For instance, groups working with slum dwellers in Dharavi have claimed
that the census data for Dharavi does not match the figures used by the Slum
Rehabilitation Authority for determining the list of eligible residents. Further,
residents are required to prove that they have been living in the area in question
since the cut-off year. The choice of the cut-off year and of the documentation
that is acceptable as proof of residence has a significant impact on the number of
residents recognized as eligible. (Patel & Arputham, 2008).
6. The Centre for Emerging Markets Solutions (CEMS) is a research centre at the
Indian School of Business (ISB).
Urban Economics: A Challenge to
Private Sector Participation
Among the many factors that influence the market
price of a residential apartment or house, the primary
determinants are size and location. Once we hold size
constant (at an approximate 300 square feet of built-up
space, in accordance with a largely accepted definition
of affordable housing), then price is almost purely
a function of location. In a monocentric city with a
central business or commercial district, the most basic
determinant of the desirability and therefore price of a
house, is its distance from the centre (O’Sullivan, 2000).
Real estate prices in central Mumbai range from
around INR 50,000 to 70,000 per square foot. If we
assume that the average household contributes about
40 per cent of their monthly income towards housing
expenditure, a family would have to earn above INR
400,000 per month in order to be able to afford a 300
square foot house in central Mumbai9
.That is more
than a hundred times the monthly earning of the least
impoverished EWS household.
While smaller cities like Pune and Hyderabad are
much less expensive, monthly incomes need to be ten
to fifteen times that of the EWS household income in
order that such households may afford a 300 square
foot home in a central area. Land becomes cheaper
as you move from the centre of the city outwards.
For instance, in Hyderabad land prices drop by more
than 50 per cent as you move from the centre to the
suburbs. However, even here, it is only the more
affluent amongst the middle-income group who can
afford to buy a home.
It can be concluded from the discussion above that
the price of real estate in majorTier 1 cities makes
private provision of affordable housing nonviable
without significant government support, even in
suburban areas. If private developers are to profitably
construct houses that will be affordable to households
earning less than INR 14,000 per month, without
subsidies, then this housing must be built either on
the peripheries ofTier 1 andTier 2 cities, or in much
smaller urban agglomerations.
Table 1.2: Affordability of Current Private Projects in India7
Income Group8
Net Monthly EMI at 40% Monthly Maximum Price Available
Income (INR) Income (INR) Affordable (INR) Projects
EWS <3,300 <1,320 1,50,000 0 of 38
LIG 3,301 – 7,500 1,320 – 3,000 3,40,000 3 of 38
MIG 7,500 – 14,000 3,001 – 5,600 6,35,000 18 of 38
HIG >14,000 >5,600 >6,35,000 17 of 38
7. In order to calculate of home affordability, we assume 40 per cent of the
household income is set aside for buying a house.For example, if the household
income is INR 10,000; the amount of money set aside for payment towards the
house will be INR 4,000 (40 per cent of INR 10,000). We assume an interest rate
of 12 per cent and a term of 20 years. These are fairly optimistic assumptions
given that the actual interest rates charged in the case of the Rajkot Pilot were
around 12.5% and the term was only 15 years. The aim of the exercise was to
establish that ownership is out of reach for the EWS and most LIG households
even under the most favourable loan conditions.
8. These classifications reflect the income group definitions prevalent in 2007 at
the time of publication of the report of the Working Group on Urban Housing. The
income slabs have since been revised to upto INR 5000 per month for EWS and
upto INR 5001 to 10000 for LIG.
9. The required monthly income in each city is based on the projected cost of
300 square feet of built-up area as per prevailing real estate prices. The actual
price of a 300 square foot apartment may differ significantly. The required
monthly income is calculated on the assumption of a maximum of a 40 per cent
contribution toward the monthly instalment on a loan of a term of 20 years, at an
interest rate of 12 per cent, where the loan to value ratio is 80 per cent.
08 09

Figure 1.2: Monthly Income Required to Afford a 300 sq.ft Home
450,000
400,000
350,000
300,000
250,000
200,000
150,000
100,000
50,000
0
Delhi Mumbai Bengaluru Chennai Hyderabad Pune
Inner-Urban
Sub-Urban
The results of the CEMSAffordable Housing Projects
Survey, 2010, bear out this conclusion. In the course of
the survey, the location of 21 affordable housing projects
distance of such projects from the periphery of the
nearest urban agglomeration was about 39 kilometres.
The eight projects located between 11 and 20
(Circles are 50 km and 100 km radius)Population
National Capital Region
Population Growth
Images Courtesy: Lall, S. et al, Presentation for Workshop on Urbanization Beyond Muncipalities, Centre for Policy Research , 2011
10. The 21 projects were selected from the original sample of 38 on the basis
of the price of the housing units. Projects catering to the HIG segment were
excluded from the scope of this analysis, even though such projects were labeled
as affordable.
was mapped10
. Eighteen of these projects catered to
the MIG segment, while three were affordable to LIG
households.The mapping revealed that the average
Figure 1.3: Affordable Housing Projects: Distance from City (Km)
12
10
8
6
4
2
0
1
10
8
2
0
Less than 10 21 to 30 More than 4010 to 20 31 to 40
(Circles are 50 km and 100 km radius)
Greater Mumbai
Population Population Growth
Images Courtesy: Lall, S. et al, Presentation for Workshop on Urbanization Beyond Muncipalities, Centre for Policy Research , 2011
kilometres from the outskirts of the nearest city, were
mainly located near cities with populations ofaround 1
million.The projects located more than 40 kilometres
from the periphery were all located near cities like
Mumbai, Delhi or Chennai, with population sizes above
5 million.
Thus, peripheral zones (also known as peri-urban
areas, in certain contexts11
) offer private developers of
affordable housing the advantage of inexpensive real
estate and, hence, the potential for feasible projects12
.
However, such areas tend to lack both physical and social
infrastructure. Further, households typically would want
to locate themselves close to centres of employment in
order to minimise time and money spent on commuting.
As a result, peri-urban areas may not always be attractive
to potential residents13
.
The location of the affordable housing project,
therefore, poses a critical challenge to private
developers.The ideal site would combine the virtues of
relatively low land cost with proximity to employment
opportunities and connectivity to the nearest urban hub.
11. Traditionally what has been referred to as the peri-urban interface has
been defined casually as ‘the edge of the city’, the ‘urban fringe’ or ‘the spatial
transition zone between urban and rural areas’ (Kölbl& Haller, 2006). A more
formal definition is that peri-urban areas lie 25kilometres away from the city
centre and are at least 2 kilometres away from a major road or rail corridor
(Trimurthy, 2005).
12. Feasibility, here, refers only to housing projects that are affordable to LIG
and MIG households. It would not be possible for the private sector to provide
houses on an ownership basis to the EWS segment, even in peripheral or
peri-urban areas, without extensive government subsidy. The viability of private
provision of rental housing for the EWS has been examined in Section 4 of this
report.
13. Note that the attractiveness of peri-urban areas would alter considerably with
provision of reliable and affordable transportation facilities.
10 11

Urbanization and Industrial Clusters
Up until the 1970s, augmentation of urban population
in India meant an almost proportionate increase in
urban density of the largest urban centres, and not an
expansion of the cities into suburbs and peripheral areas
(Brush, 1968).This pattern of growth and population
absorption has changed since the 1980s, and the
change has manifested itself most noticeably in the four
largest metropolitan cities. Mumbai, Delhi, Chennai
and Kolkata have grown both in terms of population
as well as their areal spread (Shaw, 1999).A graphical
representation of population numbers pertaining to the
Mumbai UrbanAgglomeration and the National Capital
Region from the 2001 census data clearly indicates that
growth is spilling over municipal borders and into the
peri- urban interface.
The satellite cities around Delhi, in the districts of
Gurgaon and Faridabad in Haryana, and in Ghaziabad
and Gautam Buddha Nagar (i.e., Noida & Greater
Noida) districts in Uttar Pradesh, have grown
dramatically in the past three decades.The four districts,
all primarily urban, have a combined population of 9.6
million as per provisional results of Census 2011, an
addition of 3 million since the 2001 Census (Census of
India, 2011).The Census of India defines these areas
as Out Growths (OGs), which are considered part of
the Urban Agglomeration but outside the limits of the
metropolitan authority14
.
This growth in peripheral areas is concurrent with
the development of pockets of industrial activity or
industrial clusters in these same geographies. Firms
located in the heart of large urban centres face higher
wages driven by competition among firms for skilled
labour and higher rents due to increased demand for
housing and commercial land (Lall, Shalizi & Deichman,
2001).This drives firms to locate themselves in
14. While there exists a tendency to associate the urbanization process with
the emergence of mega-cities, it is more likely that the urban population will be
distributed amongst urban areas of various sizes (Hardoy, Mitlin, &Satterthwaite,
2001). The McKinsey Urbanization Report predicts 6 mega-cities and about 68
cities with populations of over 1 million by 2030 (McKinsey, 2010).
This growth in peripheral areas is
concurrent with the development
of pockets of industrial activity or
industrial clusters in these same
geographies.
Table 1.3: Growth of Indian Town and Cities 2001-2011
Type of Urban Units 2011 Census 2001 Census Addition in 2001-11
1. Towns: 7,935 5,161 2,774
(a) Statutory Towns 4,041 3,799 242
(b) Census Towns 3,894 1,362 2,532
2. Urban Agglomerations 475 384 91
3. Out Growths (OGs) 981 962 19
Data source: Census of India 2001, 2011, Government of India
specialized industrial clusters located on the periphery
of urban centres, where land and labour costs are lower,
but where they accrue benefits from co-location with
other firms engaged in the same activity.The benefits of
co-location have been discussed in a fair amount of detail
in the literature15
(Marshall, 1890; Henderson, 1974;
Carlino, 1978 and Selting et al. 1994).As these centres
grow, they attract ancillary industries and service
providers of various kinds and over time may become
self-sufficient satellite towns.
Industrial clusters of the kind discussed above,represent
ideal locations for private affordable housing projects.
As such areas attract migrant labour from nearby towns
and villages, the low cost of land for housing is met with
an effective demand for affordable projects.The absence
of social infrastructure is largely offset by rail or road
connectivity to larger urban agglomerations16
.
Further, provision of good quality affordable housing
by private developers in such areas would enhance the
urbanization process, obviate the creation of shanty
towns and have a meaningful impact on the growing
housing shortfall.
CEMS began conducting research into the possibility
of private sector participation in affordable housing
in 2008, and identified the significance of industrial
clusters. In September 2010, ISB became a knowledge
partner in a pilot affordable housing project situated
in an industrial cluster outside the city of Rajkot in
Gujarat.The housing project was a direct outcome
of research conducted at ISB. Further, ISB helped
raise private capital from commercial investors and
supervised the execution of the project.The proposed
single storey housing model, focusing on peri-urban
areas and industrial zones, was a radical departure
from the low rise models under development.The land
required for the pilot project was acquired at market
prices without state intervention and the project built
housing units affordable even to LIG households. Section
2 describes this peri-urban housing initiative. Section 3
examines the insights offered by the pilot project and
the lessons learnt from this experience.While Sections
2 and 3 establish that the private sector can provide
housing on an ownership basis to certain segments of the
Lower Income Group, they also reveal that this model
would not be accessible to the EconomicallyWeaker
Section and to the bottom rungs of the Lower Income
Group. Section 4 outlines two for-profit rental models
that could be used to bridge this gap. Section 5 examines
certain land and infrastructural initiatives that could be
undertaken by the state in order to address some of the
challenges specific to housing projects situated in peri-
urban areas.These initiatives could ensure wider access
to the private housing models previously examined
in this report.A detailed analysis of construction
technologies pertinent to affordable housing and a
proposed standard form contract based on the model
tenancy act can be found in the appendices.
The proposals in this report are restricted to the
creation of new affordable housing stock (albeit, both
ownership as well as rental models) in peri-urban areas
situated close to industrial agglomerations. Housing
in urban and suburban areas falls outside the scope of
this report, as do issues of slum redevelopment and
incremental housing.
15. The benefits of agglomeration, such as enhanced supply chain
responsiveness, easier access to markets and talent and lowered logistics costs,
have also found mention in the National Manufacturing Policy, 2011. The policy
statement seeks to promote the creation of industrial clusters by establishing
National Investment and Manufacturing Zones (NIMZ). The NIMZ are to be
developed as integrated industrial townships and are required to provide worker
housing at reasonable rates. Each NIMZ is to spread across 5000 hectares and
state governments have been allocated the responsibility of making land available
through acquisition and use of existing state land banks.
16. These factors have been discussed in greater detail in Section 3.
12 13

The Rajkot Pilot
Affordable
Housing Project
Section 02

The Rajkot pilot affordable housing project, located in
Shapar, was launched inAugust 2010 and completed
in January 2012. Shapar is an industrial zone situated
15 kilometres from the city of Rajkot, Gujarat, and the
project catered to local and migrant workers employed
in various industries in the neighbouring region.
The project comprised of 218 units and offered home-
buyers two housing alternatives.The first option (Type
1) was a house with 2 rooms, a kitchen and a bathroom,
with a land area of 430 square feet.The price of this unit
was INR 480,000 (USD 9,600)17
.The second option
(Type 2) was a smaller home with one room, a kitchen
and a bathroom, and a land area of 272 square feet.
This unit was sold at INR 311,000 (USD 6,220).The
developers priced the units within a range affordable
to LIG and MIG households, with the objective of
selling a maximum possible number of units at the
time of launch.This would ensure cash inflow at the
commencement of construction. In keeping with this
goal, a remarkable 67 per cent, or 148 of the 218, units
were pre-sold on the first day of sales, despite minimal
investment in promotional activities.
Business Model
The Rajkot pilot project was financed by 100 per
cent equity and was based on a continuous cash flow
model - a process where all the units are sold upfront
and further instalments received at regular stages of
development. Land was considered as equity and initial
construction cost was funded by pre-sales collection.
Notably, this system made a break from the practice of
holding on to housing units until a later date in order to
take advantage of price appreciation, a practice common
amongst Indian real estate developers.This innovative
approach yielded an internal rate of return of about
100 per cent despite the relatively slim profit margins
associated with the project.
Project Information
Choice of project site:
• The project was located in proximity to an industrial
area because of the demand for affordable housing
created by industrial workers.Additionally, the
employment security provided by the industries
improved the risk profile of potential purchasers.
• The site was located a mere 300 metres from a main
The Rajkot Pilot
Affordable Housing
Project: A Brief
Description
17. Rate of conversion – USD 1 = INR 50
Figure 2.1: Pilot Project - Development Phases (No. of Units)
35
38
7680
70
60
50
40
30
20
10
0
Phase 1 Phase 2 Phase 3
35 34
Data source: Pilot Housing Project
Type 2Type 1
• Social infrastructure near the site was already in place.
The closest village, Shapar, with a population of 1,212
people, was located a kilometre from the chosen
project site.
Design:
The pilot affordable housing township was built on a
total effective area of 4.5 acres (approximately 20,234
sq. metres) and offered theType 1 andType 2 housing
options described above.The housing units included
facilities such as electricity, a running water connection
with water tanks for each unit and septic tanks for
sewage water disposal.
road constructed by the government, thus reducing
the cost of building an inner road.
• The site provided easy access to National Highway
8 (located at a distance of 2.6 kilometres from the
project), thereby easing the commute to work.
Figure 2.3: Schedule of Payments for Rajkot Pilot Project
% Payment Received
20% 15% 15% 15% 15% 15% 5%
Day of Plinth Slab Finishing
Booking Walls Plaster Possession
the city is considered the economic, industrial and
educational hub of the region. Rajkot has 16 industrial
agglomerations, is well connected by National and State
highways, and has more than a hundred medium scale
/ large scale industrial units.The engineering and auto
ancillary industry is viewed as the growth engine of the
district. Other leading industries in the area include
textiles & apparels, chemicals and infrastructure.The
industrial zone also includes forging, casting, solvent
plants, paper, milk products, ceramics, electronics and
pharmaceuticals units (Industries Commissionerate,
Government of Gujarat,Web-site LastVisited on March
1, 2012).
Rajkot Comparative Land Prices
As you move from the centre to the suburbs, land prices
in Rajkot drop by almost 60 per cent.There is an equally
dramatic drop as you move from suburban Rajkot to
peri-urban areas like Shapar, where the housing project
is situated.The price of land in this area is one of the key
reasons for the viability of the project.
Rajkot Industrial Context
Rajkot is located in the south-west region of Gujarat.
Rajkot city, the district headquarter, is the largest city
in Saurashtra and the fourth largest in the state.With
a population of 1,390,933 (Census of India, 2011),
Figure 2.2: Comparative Land Prices for Rajkot
Rajkot comparative Land Prices
100%
63%
43%
3%
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
Inner Urban Urban Sub-Urban Peri-Urban
Data Source: CEMS Research
*This analysis is based on the land price data of residential plots in Rajkot.
16 17

Type 1 Unit Design Plan
Type 2 Unit Design Plan
The unique selling point of this project was the‘single
storey structure’ of the units, which provided the
purchaser with the option of building an additional floor
in the future.
The promoters used feedback from focus-group
discussions with industrial workers in the area, to
inform their design decisions.The private, walled, front
and back yards18
were included in the design based on
this feedback. Further, certain design characteristics
of the smaller unit (Type 2) were included to cater
specifically to the preferences of low-income families;
features that may not be preferred or may not even
be acceptable to households from a different socio-
economic class. Examples of such characteristics are the
creation of storage space above the roof of the toilet and
the fact that residents must exit onto the backyard in
order to access the toilet.19
Costing:
The total cost of building aType 1 unit was
approximately INR 203,835 (USD 4076) and the
cost per square foot of the built-up area was INR
724 (USD 14.5).The total cost of aType 2 unit was
approximately INR 111,046 (USD 2,221), with the cost
per square foot of built-up area coming down to INR
702 (USD 14).20
Project Management:While the materials were sourced
internally by the developers, labour was contracted
to a third party.As per the labour agreement, the
developers had only one point of contact through whom
all interactions with labour were channelized.This
arrangement reduced the likelihood of the developers
having to deal with labour disputes associated with the
project.
Marketing and Promotion:
The Rajkot project was primarily marketed through
direct marketing channels.The developers targeted the
industries in the vicinity, who in turn communicated
project details to their employees. Newspaper
advertising for only two consecutive days led to an
excellent response.Approximately 1,000 potential
buyers contacted the developers for the available 218
units on the day the project was launched.
Banks’ Terms and Conditions:
The State Bank of India, the Housing Development
Finance Corporation and Gruh Finance Ltd. provided
housing loans to the buyers. In order to prove eligibility
for the home loan, every salaried person had to present
pay slips to the banks. Self-employed buyers had to
present proof of income-tax filings for the 3 consecutive
years prior to the year in which the loan application had
been made.At an interest rate of approximately 12.5
per cent and loan repayment tenure of 15 years, loans
were availed up to 80 per cent of the house value.The
housing unit purchased was used as collateral for the
housing loan.
While there is much to be learnt by examining what
worked in the case of the Rajkot pilot project, these
lessons are best extracted after careful consideration
of specific circumstances of the project, and how these
compare with pertinent studies in this field.The next
section focuses on insights drawn from a survey of
customers of the pilot project, and from the housing and
urban literature.
18. While the built-up areas of the Type 1 and Type 2 units are 430 and 272
square feet, the carpet areas are about 280 and 170 square feet, respectively. The
considerable discrepancy between the built-up and carpet area is accounted for
by the walled, front and back yards, which can be used for washing dishes and
clothes and for entertaining guests.
19. Storage space was created by lowering the ceiling of the toilet, thus creating
a gap between it and the top slab. Situating the toilet entrance in the backyard
allowed a maximization of internal wall-space. This arrangement was also
preferred by some buyers, because they perceived it to be more hygienic than
having an entrance to the toilet opposite the cooking area.
20. This estimation of costs excludes land prices.
18 19

Insights Into
Affordable
Housing in Peri-
Urban Areas
Section 03

First-Time Home Owners Upgraders
Figure 3.1: First-Time Home Owners vs. Upgraders
7
13
Data Source: CEMS Affordable Housing Ethnographic Study, 2011
Insights Into
Affordable Housing
in Peri-Urban Areas
A Profile of Buyers of Rajkot Pilot
Affordable Housing Units And a
Break-down of Purchase Decisions
In order to understand the triggers for purchase, the
ethnographic study drew on a random sample of 20
home buyers of the 164 who had expressed an intention
of living in the Rajkot housing units.21
The monthly
household income of the buyers participating in the
survey was in the range of INR 6,500 – INR 18,000 and
the family size varied between 2 and 6 members.The
sample included second generation city dwellers as well
as purchasers who had migrated from villages in search
of better prospects.
Of the buyers surveyed, 13 were first time home
owners, currently living in rented accommodations and
spending between INR 1,500 to INR 3,000 on monthly
rent.A majority of these buyers were industrial workers
living in rental accommodation in Rajkot city who
had to travel long distances to reach their workplace.
Affordability and location were the primary pain points
for this category of buyers. In addition, they perceived
home ownership as a source of security, stability and
social status. Furthermore, it gave them a sense of
independence and a reconfirmation of getting settled
in the city.The second category of home buyers already
owned a house, but aspired to upgrade to a better
environment, or move closer to their workplace. In
some cases, such buyers were sharing the family house
and wanted to move to an independent space.
In addition to the factors identified above, the survey
indicated that the provision of amenities such as water
supply and electricity, as well as proximity to social
infrastructure (such as schools) played a role in the
decision making matrix of the purchasers, both first-
time and upgraders.
The survey also yielded the occupational break-down
of the buyers.While the heads of half the households
surveyed were employed as industrial labour, the rest
21. Approximately 25 per cent of the purchasers saw the Rajkot housing
project as an investment opportunity and had not bought the dwelling units
in order to move into them. Some of these buyers were owners of nearby
factories or employed as senior management and planned to lease these units
out to employees. While such purchasers did not belong to the target income
group, they served the useful function of providing the initial capital to begin
construction. Home buyers are often hesitant to invest in a project before they
actually see construction begin. Investors or market makers come in to fill this
gap.
Table 3.1: Decision Drivers for Home Buyers
Reasons for Purchase Mentioned by Majority Reasons for Purchase Mentioned by at least One Respondent
Affordability Investment
Design Reliable Construction
Location Availability of Loans
Sense of Ownership Financial Security
Provision of Amenities including Water and Electricity
Proximity to Schools
Choice of Location of Residence
Proximity toWorkplace
In a monocentric city with a central business or
commercial district (CBD), households have to choose
between locating themselves close to the centre and
paying higher rents or finding cheaper housing and
paying more to come in to work everyday. Urban
economic theory predicts that poor households will
choose to locate themselves closer to the CBD, saving on
transport costs and paying higher rental rates.Wealthy
households on the other hand will choose to live further
from the city centre, in order to rent larger living
While the heads of half the
households surveyed were
employed as industrial labour,
the rest were engaged in
various other professions, and
included sales professionals,
medical workers, electricians
and street hawkers. It is
significant that affordable
housing in an industrial
area need not solely cater to
industrial workers.
were engaged in various other professions, and included
sales professionals, medical workers, electricians and
street hawkers. It is significant that affordable housing
in an industrial area need not solely cater to industrial
workers. Survey responses demonstrate that affordable
housing in an area that offers the advantages of social
and physical infrastructure would appeal to households
engaged in other professions as well.
Figure 3.2: Occupational Distribution of Home Buyers
1
10
5
2
2
Industrial workers
Sales Professional
Medical worker
Self employed
Electricial
Data Source: CEMS Affordable Housing Ethnographic Study, 2011
22 23

units, and will pay relatively more to commute to work
(Alonso, 1964; Muth, 1969).
While this insight holds for most cities in the United
States, the logic does not seem to apply to cities in
Europe where the rich typically live in the centre of
the city. If one moves away from the idea of a CBD,
and merely measures average distance to work for
different classes, the central idea seems to hold true
in other geographies as well.The poor prefer to locate
themselves close to their place of work.A study on
urban poverty and transport in Mumbai reveals that
in the case of households earning less than INR 5,000,
about fifty per cent live within one or two kilometres
of their workplaces.Additionally, the average commute
time for these households was about 20 minutes, and
that for the highest class of household surveyed was
closer to 35 minutes (Baker et al., 2005).
The fact that poor households reveal a strong preference
for locations close to the workplace in a city like
Mumbai, which has a relatively well-connected and
inexpensive transport network, is significant.This
indicates that the preference to live close to the
workplace should manifest itself with at least equal
prominence in less well-connected geographies.
Figure 3.3: Average One-way Commute Time By Income
Group in Mumbai (Minutes/INR)
20
23
26 26
34
35
30
25
20
15
10
5
0
Source: Baker, Judy & Basu, Rakhi & Cropper, Maureen & Lall, Somik & Takeuchi, Akie,
2005. “Urban poverty and transport : the case of Mumbai,” Policy Research Working
Paper Series 3693, The World Bank.
Below 5,000 5,000 - 7,500 7,500 - 10,000
10,000 - 20,000 Above 20,000
Map of Shapar-Veraval, indicating location of the Rajkot Housing Project, Gujarat
Data source: Google Maps, date accessed 08 March 2012.
Figure 3.4: Detailed Location Map of Pilot Project
“The Rajkot housing project is very close
to Shapar town that has many industries.
Staying close to my work place, which is 5
minutes from the project site, will reduce
my travel time and cost.”
- Mr.Z,employee ofTrishul Motors who lives in a rented
accommodation and currently commutes 45 minutes to
reach his workplace.
The location of the Rajkot housing project in Shapar-
Veraval, an industrial cluster reported to employ
between 50,000 and 60,000 workers, was central to
the business plan, and to its eventual success.
Access to Physical and Social
Infrastructure
Aside from proximity to the workplace, proximity
of schools and hospitals have been found to have
a significant impact on decisions of residential
location.AWorld Bank study conducted in Pune,
Maharashtra looked at the value attributed by
residents across different income groups to different
characteristics of a house (Kapoor et al., 2004).The
study revealed that being within a kilometre of a
school was strongly preferred.While all households
valued services such as piped water, sanitation
facilities, roads and basic transportation, the poor
value and are willing to pay proportionately more
for certain services than wealthy households.A
connection to the mains water is four times more
valuable to the poor as a proportion of rent; sewers,
distance to bus, safety, minimal air pollution, are
all worth twice as much to the poor (Lall and
Lundberg, 2006).
“Presence of a good school nearby was of
utmost importance when we were looking for a
house to buy…With easy accessibility to school
by the school buses, living here makes a lot of
sense..”
- Mrs.B,is the wife of a flour mill employee,employed in Rajkot
city centre.
In the case of the Rajkot housing project, interviews
with home buyers revealed that proximity to Shapar
Town(less than a kilometre), which provides access
to a school, grocery shops and other amenities, added
to the project’s attractiveness.The National Highway
that provides direct access to Rajkot city lies about two
and a half kilometres away.There is a bus stop at that
intersection of the highway.The ride into the centre of
town by car takes roughly 30-40 minutes depending on
traffic, while the bus would take 45-90 minutes.
The choice of Shapar as a location has been vindicated
by the immense interest and demand generated amongst
buyers. However, the greatest indication of its suitability
is the fact that about 9 independent housing projects
have sprung up in the area, following the launch of the
Rajkot pilot project. If these projects are completed, an
additional 4,000 residential units will be available in this
area.We do not currently know, however, if these units
will be affordable to the Lower Income Group.
A study on urban poverty and
transport in Mumbai reveals that in
the case of households earning less
than INR 5,000, about fifty per cent
live within one or two kilometres of
their workplaces.
24 25

Choice of Low Rise versus High Rise
The choice of whether to build low-rise or high-rise
is largely determined by stipulated FSI or Floor Space
Index in the area. FSI, often referred to as FAR or Floor
Area Ratio, is the ratio of plot size to constructed area.
An FSI of 2 implies that the total constructed area must
be no more than twice the area of the plot of land.
Depending on the prevailing laws, FSI can range from
1 to 4.This has a direct impact on how many floors a
developer can construct.
However, the trade-off between the cost of land
and the cost of construction also plays a prominent
role in this choice. In the case of the Rajkot housing
project, the FSI ceiling was at 1.25, but the developers
chose to construct a single storey structure.While
constructing additional floors reduces land cost per
unit, the construction cost increases dramatically for
structures with Ground +2 or more. Depending on the
construction technology being used, the additional cost
of strengthening foundations and reinforcements can
push the outlay up by a hundred per cent. Further, any
residential structure higher than Ground + 2 requires
the addition of a lift, which adds about INR 500,000 to
the cost, In addition to the cost of constructing passages
and stairwells.
In general, going vertical begins to make sense when
the saving on land cost outweighs the increase in
construction cost.While this is specific to technology
and the design of the unit, building high rise apartments
begin to makes sense when land cost exceeds about INR
700 to 1,000per square foot.22
“I did not want to buy a flat as I would not be
able to make modifications to the unit. In this
unit, I can build an additional floor and alter it
to match my needs.”
- Mr.Y belongs to a single income family who moved to
Rajkot from Junagarh in search of employment.
Aside from the cost, both focus group discussions
with potential buyers before construction and
interviews with home buyers ex post, revealed a
preference for ground floor structures. In this case
the buyer receives ownership of the plot of land as
well as the house.The option of adding a second floor
at a later date was seen as particularly attractive.This
addition is possible without making any structural
changes to the ground floor.
22. This calculation is based on current costs, using traditional construction
techniques, under prevailing FSI limits, in peri-urban and urban areas excluding
Mumbai.
Land Infrastructure Construction
Figure 3.5: Comparative Costs for Ground vs. Low-Rise*
600,000
500,000
400,000
300,000
200,000
100,000
0
Ground Only Ground+2
339,166
506,929
INR
*The Base Unit for Comparison is a variation of UnitType 1
from the Rajkot Pilot Project.
Choice of Construction Technology
The CEMS Survey ofAlternative Construction
Technologies forAffordable Housing (2011) assessed
various construction technologies on the basis of
cost, raw material and labour requirements.These
technologies can broadly be classified under two
categories:Off-site and On-site. In the case of‘off-
site’ technology, components are manufactured
‘off-site’ and transported to the construction site for
assembly.With‘on-site’ construction technology, the
building panels are manufactured and assembled at
the construction site itself.
Price Comparison of Construction
Technologies
As indicated by this table, certain technologies
improve affordability by reducing the cost of
construction - primarily by minimising construction
time, streamlining the construction process and
making quality control easier. However, the high
initial capital investment required to purchase
such technologies often acts as a deterrent to their
adoption.This large investment can only be justified
in projects of 1,500 units or more, where the
technology is reusable and the plan employs simple,
repetitive designs.23
As the Rajkot housing project consists of only 218
dwelling units, the developers opted for the use of brick
and mortar. In addition to the low capital investment
required, the ease of availability of materials and labour
associated with the use of brick and mortar played
a significant role in its choice. In addition, market
surveys indicated a buyer preference for the traditional
technology, because of its familiarity.
Additional Research Questions
The Rajkot pilot affordable housing project raises a
number of intriguing questions for further investigation
and study. One peculiarity of the pattern of sales
was thatType 1 (larger) units sold faster thanType 2
(smaller). Of the 148 units sold on the first day, 104
wereType 1. Only 46Type 2 units were sold on the
first day.While most of the remainingType 1 units
were subsequently sold, there was clearly greater
interest in and demand for the larger units.This pattern
could indicate that 272 square feet of space is a more
appropriate size for a family.Additionally, as indicated
by the survey, the larger unit is expected to appreciate
faster and allows its owners greater flexibility in the
future.Alternatively, this may indicate that middle
income home buyers who can afford both units are
willing to stretch their budget, or are more easily able to
access finance.
23. Please refer to Appendix 1 for a more detailed discussion on construction
technologies.
Table 3.2: Comparative Costs for Construction Technologies
Off-Site On-Site
Brick & Mortar AAC Bricks Prefab Panels Formwork Concrete
Material 100% 110% 120% 95%
Equipment 100% 100% 140% 100%
Labour 100% 90% 60% 70%
Project Time 100% 90% 40% 50%
* Approximated costs based on survey in December 2010
26 27

The other set of questions that this study raises pertain
to the ideal source of capital for affordable housing
projects.While the affordable housing business model is
based on front ended sales and low margins, a situation
where you have unsold stock and surging real estate
prices could tempt investors to ride the price rise.This
in turn may lead to speculative price rise and a situation
where the houses become unaffordable to the target
group and a locked market where no transactions take
place.Although patient long-term capital investors are
ideal, they are not always easy to access.Alternatively,
there may be a need to structure contracts to prevent
excessive monetization. Further research into these
issues could assist the private sector in meeting the
challenge of producing affordable housing on the
required scale.
While identifying the ideal unit size, the source of
capital, and the location, design and technology that
would minimize costs is essential, a housing solution
based entirely on an ownership model would still not
address the needs of the EWS and the lower rungs of
the LIG. Keeping this factor in mind, the next section
explores potential private sector affordable rental
models, which could address the needs of a much larger
section of the poor.
Foundation: Pozallona
Cement & Local Stone
Wall: Soil
Stabilised Blocks
Roof: Structurally
Insulated Cement Panel
Floor Local Stone
Surface Finishing:
Lime Plaster
Figure 3.6: Cost Comparison of
Non-Green Vs. Optimal Green Technology in Housing
120,000
100,000
80,000
60,000
40,000
20,000
0
Traditional Green
Green Affordable Housing
Given the scale of the housing requirement (24.7
million units), the potential impact of the construction
industry on the environment is enormous.Any
reduction of this impact, howsoever small, could make a
significant difference to the ecology of the country.
While there has been increasing emphasis on building
green in India, it is primarily in commercial or high-end
The CEMS Survey ofAlternative Green Building
Materials (2010) identified Pozollona cement, local
stone rubble, fly ash blocks, soil stabilised blocks, fillers
and lime plaster as green material that can replace
traditional building material without any incremental
increase in cost.
While green building alternatives are available at
comparable costs, continued use of the traditional
brick and mortar technology suggests lack of awareness
of the viability of alternative technology amongst
developers and buyers. In addition, manufacture of
green building material does not occur on the same
scale as conventional material.This may result in the
limited supply of such green material.An increase in
demand, however, should see a natural correction of
this phenomenon. Further, government interventions
(such as awareness campaigns, providing financial
incentives and developing affordable housing green
building certification mechanisms) could promote wider
acceptance of green building material in the low cost
housing industry.
residential projects that the idea of building green has
been translated into practice.There has been little or no
shift in this direction on the part of affordable housing
developers.A CEMS survey* revealed that there is a
common perception amongst developers that building
green is less cost effective than traditional construction.
Contrary to this belief, it has been found that a low cost
house can be built using green material at comparable, if
not lower, costs. * The CEMS Survey of Barriers to Entry Into Green Affordable Housing
28 29

There has been much discussion of the merits of
ownership vis-a-vis rental, with countries like
Singapore, SouthAfrica and China adopting pro-
ownership housing policies grounded in the belief that
a society based on home ownership is desirable (United
Nations Human Settlements Programme, 2003).The
relationship between home ownership and economic
growth or socio-political stabilityis not clear, and some
advanced economies like Germany and Switzerland
exhibit surprisingly low rates of ownership, with a
correspondingly high proportion of the population
choosing to rent.
Rental Housing
Rental housing has beenshown to have a valid and
beneficial role to play in any urban area and in
many cities of the developing world (Lemer, 1987),
particularly so in India.
Rental housing provides its residents with two key
advantages – affordability and flexibility.According
to the CEMS Affordable Housing Projects Survey,
2010, the cheapest house available on an ownership
basis then cost INR 311,000.24
Given that the average
family cannot contribute more than 40 per cent of its
income towards housing (in addition, they must also
Singapore
India
China
SouthAfrica
Brazil
Mexico
UK
USA
Sweden
Japan
RepublicofKorea
Germany
Switzerland
Figure 4.1: Homeownership Rates Across Contries
89
84
80
77
74
71 71
67 66
61
56
53
44
100
90
80
70
60
50
40
30
20
10
0
Data Source: European Mortgage Federation, National Statistics Offices, World Bank, United Nations Economic Commission for Europe, International Union for Housing Finance,
Organisation for Economic Co-operation and Development, Department of Statistics, Singapore; Census of South Africa 2011; PNAD 2009 / IBGE; Korea National Statistical Office,
Population and Housing Survey, European Union Statistics on Income and Living Conditions (EU-SILC); NSSO, Report on Housing and Amenities 2008-09.
24. Figures quoted refer to actual sale price of Type 2 Unit, Rajkot Pilot Project.
25. Individuals who move for periods between 30 days to 6 months.
26. About 3.3 million short term migrants are engaged in manufacturing and about 4.2 million in construction, the labour often hired on an ad hoc basis.Rental housing
offers them flexibility and mobility, so they can move quickly to jobs in other locations if need be.
be eligible for a home loan and provide the 20 per cent
down payment), it is evident from the table below that
households earning less than INR 7,000 per month
cannot afford home ownership.
Further, access to affordable and well-located rental
housing is influential in determining the extent to which
migrants are able to secure an economic foothold in the
city and consolidate their urban status (Kumar, 2001).
Migrants typically opt for rental housing when they first
move to a new location, while they search for jobs and
gather information about available housing options.
In addition to long term migrants, who account for
about a fifth of the urban growth rate in India, about
14 million short-term migrants25
move to cities for
brief periods every year (GOI, 2009).The majority
move in search for employment.26
While rental housing
is a sensible option for migrants who have made a
permanent move, it is a necessity for short-term
migrants.This creates a specific demand for rental
housing.
Monthly Income Expenditure on Housing Total Loan Amount House Price
(80% of the house)
14000 5600 5,08,588.73 6,35,736
MIG 12000 4800 4,35,933.20 5,44,916
1000 4000 3,63,277.67 4,54,097
8500 3400 3,08,786.02 3,85,983
7500 3000 2,72,458.25 3,40,573
7000 2800 2,54,294.37 3,17,573
LIG 6000 2400 2,17,966.60 2,72,458
5000 2000 1,81,638.83 2,27,049
4000 1600 1,45,311.07 1,81,639
3300 1320 1,19,881.63 1,49,852
2700 1080 98,084.97 1,22,606
EWS 2500 1000 90,819.42 1,13,524
2250 900 81,737.47 1,02,172
2000 800 72,655.53 90,819
Table 4.1: Home Affordability Based on Monthly Income (INR)
Loan Period (Years) - 20 Income Percentage - 40 Interest Rate (%) - 12 Down Payment (%) - 20
CanAffordOwnershipCannotAffordOwnership
32 33

The State of Formal Rental Housing
in India
The significant role that a robust rental housing stock
can play in alleviating the housing shortfall has largely
been overlooked in India.As a result, only about 5 per
cent of urban dwellers live in formal rental residences,
with security of tenure and a written contract. 84
per cent of them live in informal rentals, where there
is no written contract, in structures often illegally
constructed, badly maintained and without access to
basic amenities such as water, electricity and proper
sanitation (GOI, 2010).
One of the main reasons for the low participation of the
formal sector in residential rental markets is that rental
yields are typically between 2-3 per cent. Most landlords
see rental income as an additional benefit to capital gains
from real estate investment, where houses are rented
out while the owners wait for the value of the property
to appreciate.This means that rental supply does not
respond directly to shifts in rental demand and that an
increase in rents does not necessarily translate into an
increase in the supply of houses available for rent.
Figure 4.3: Tenurial Status for Urban India
61.50%
25.40%
5.00%
4.70%
3.30%
Source: NSSO 65th Round (2008-09) –
Report on Housing Conditions and Amenities in India
Owned dwelling
Employer’s Quarter
Hired Dwelling - Formal
Hired Dwelling - Informal
Others
Figure 4.2: Sector-wise Short-term Migration for Employment from Rural Areas
45%
40%
35%
30%
25%
20%
15%
10%
5%
0%
23.6%
Agriculture, etc Mining
& Quarring
Manufacturing Electricity,
water...
Construction Trade, Hotel & ... Transport Other Services
16.8%
0.2%
12.6%
0.6%1.3%
26.0%
41.6%
25.2%
18.1%
4.9% 3.7%
12.2%
5.7%
7.3%
0.4%
To Rural To Urban
Data Source: NSS 64th Round (2007-09) – Report on ‘Migration In India’
27. The Report of the Rent Acts Enquiry Committee published by the Government
of Maharashtra in 1976, the Twelfth Report of the Maharashtra State Law
commission published in 1979, the Report of a Study by the Economic
Administration Reforms Commission published by the Government of India in
1982 and the Sixth Report of the Uttar Pradesh State Law Commission, 2010 are
a few examples of such efforts.
28. While the Model Residential Tenancy Act, 2011 makes a decisive move
towards de-regulation, it does contain a few ambiguous provisions. For instance,
Section 11 suggests that the landlord or the tenant may apply to the rent tribunal
for fixation or revision of rent. However, it is not clear under what circumstances
such an application may be made, as the Act also states that the rent is to be
determined by agreement between the parties.
Further, the Act makes it compulsory for the rental agreement to be in writing and
registered or notarized. In most states, a written agreement is not mandated for
leases of less than a year. Considering that an attempt is being made to cover the
EWS/LIG section, such a requirement may place the poor in a more detrimental
situation than before. Their position could be reduced to that of a trespasser, at
the worst, or a licensee (instead of a lessee), as their oral agreement with the
landlord may not be legally valid.
29. In order to illustrate the lowest cost at which rental may be provided, a Type
2 Ground+1 design has been selected for the purpose of this model as it is the
cheaper of the two units. A similar analysis can be done with an extension of
the Type 1 unit, but the corresponding rent chargeable will double for the same
yields.
A Note on Rent Control
In addition to low rental yields, archaic rent control
legislations have been identified as a cause for inhibiting
the growth of the rental market. Over the years,
loosening the grip of regulation on this field has been
the subject matter of study of a number of committees
set up by the central and state governments.27
In July 1992, the Government of India proposed a
Model Rent Control Legislation to address some of the
lacunae of the then existing rent control regime. In an
attempt to boost rental stock and to reverse the freeze
on rents that had occurred in a few states, it provided
for a formula for regular enhancement of rents. It,
however, continued to provide limited grounds for
eviction of tenants and continued to regulate the
rent that could be charged (Ministry of Urban
Development, 1992).
Over the next two decades, the position of the
government moved towards greater de-regulation.As a
result, the Model ResidentialTenancyAct proposed by
the Ministry of Housing and Urban PovertyAlleviation
in 2011, placed great emphasis on the agreement
between the landlord and tenant in order to determine
the terms of the lease. It dispensed with notions of
formulas based on construction costs for determination
of the appropriate rent. It provided for tenancies of
fixed term which would give landlords more control
over their property. Further, it provided for de-
requisitioning of rental properties commandeered
or allotted by the government under previous rent
control laws (MHUPA, 2011b).28
While there has been a move from ideas of strict
regulation to a more market based approach to
pricing and tenure, rental legislationsare yet to catch
up with this development.According to the Jawaharlal
Nehru National Urban Renewal Mission Monitoring
Formats, produced by the Ministry of Urban
Development, a large number of states have not met
their commitments with respect to rental reform,
as of 31st December, 2011 (Ministry of Urban
Development,Web-site LastVisited on February 28,
2012). Once these commitments are met, there will
be greater scope for the development of a thriving
rental market.
A Proposed Rental Model for
Households Earning INR 2,700
Our proposed rental model, which caters to
segments of the EWS population, offers households
accommodation in a 272 square foot home with an
attached toilet and kitchenette.The design of the
basic structure, used to calculate costs, yield and
appreciation, is an extension of theType 2 dwelling
unit in the Rajkot pilot affordable housing project.
The structure includes an additional floor and access
through the provision of an external staircase.29
34 35

for the building to meet safety norms.This drives up the
construction costs for each unit. In addition, while an
external metal staircase is acceptable for the Ground+1
model, the Ground+2 model would require an internal
concrete staircase.This increases the super built-up area,
requiring additional FSI, apart from the increased cost of
the staircase itself.
Based on the results of the simulation of this model,
it may be possible to provide housing to households
earning as little as INR 2,700 a month. If monthly rent
is calculated at INR 800, investors will earn an annual
yield of over 6 per cent. Further, the business model
includes a provision for exit after a period of ten years.
The return for investors is estimated at over 20 per
cent, when project value appreciation is considered in
addition to the rental yield.
Caveat 1: The Relationship Between
Land Cost and the Optimality of the
Model
The price of land around industrial clusters is
significantly lower than within city limits.The
economics of this model only works in locations where
proximity to workplace creates demand for housing and
the relatively low cost of land allows private providers to
offer affordable rental housing.A Ground+1 stack is the most cost effective design for
the rental model as it allows for maximum utilisation
of Floor Space Index (FSI) and minimisation of land
cost per unit.The land cost for the Ground+1 model is
approximately 12 per cent of the total cost of the unit.
This proportion is significantly lower than for a Ground-
only model, and slightly lower than for a Ground+2
structure.
The construction costs for Ground+1 is also marginally
lower than Ground-only structures, as the cost of the
foundation work is split between the two units.Adding a
third storey, however, requires additional reinforcements
Figure 4.4: Yearly Rental Yield Curve for Type 2 unit*
0.15
0.1
0.05
0
1 2 3 4 5 6 7 8 9 10 11
Type 2 - Ground+1
*Assumptions:Monthly Rent - INR 800,
Annual Rent Appreciation - 10%,
Annual Maintenance - 1% of Annual Revenue
Figure 4.5: Rental Yields for Dormitory Model*
20%
15%
10%
5%
0%
1 2 3 4 5 6 7 8 9 10
RentalYield
Year
*Assumptions:No.of Rooms - 500,
People Per Room - 3,
Monthly Rent Per Person - INR 500,
Rent Appreciation - 10% Per Annum,
Maintenance Cost - 1% of Annual Revenue
Table 4.2: Rental Affordability Based on Monthly Income (INR)
Income Rent as % of Rent Paid
Income
7500 30% 2250
7000 30% 2100
LIG 6000 30% 1800
5000 30% 1500
4000 30% 1200
3300 30% 990
2700 30% 810
EWS 2500 30% 750
2250 30% 675
2000 30% 600
CanAfford
Rental
CannotAfford
Rental
of nearly 11 per cent in year Five and approximately 17
per cent at the end of yearTen.
A comparison of the rental yields at varying levels of
rent per month as well as number of occupants per
room has been tabulated below.The rental yields for
the model range from 5 per cent for two occupants per
room paying a rent of INR 500 per month, to 21 per
cent in the case of four occupants paying a rent of INR
1,000 each.
Table 4.3: Rental Yields for Dormitory Model
Rent (INR) Number of Occupants
2 3 4
500 5% 8% 11%
600 6% 10% 13%
700 8% 11% 15%
800 9% 13% 17%
900 10% 14% 19%
1000 11% 16% 21%
Caveat 2: Investor Interest
While this model has yet to be piloted, conversations
with investors have been promising.A rental yield of 6-8
per cent in the first year is considered excellent in the
Indian context where residential rental yields fall within
the 2-3 per cent range. Investors perceive our model to
be a hybrid in which they will make their exit through a
sale inYear 10 orYear 15 and cost of capital will be offset
through rental yields.
A Proposed Dormitory Model for
Individuals
The model discussed above is designed for migrant
households. However, there is also a need for worker
hostels that cater to individuals without families, who
require cheap, shared accommodation.The dormitory
model is a variation designed to cater to this segment
The proposed model is a three storey Ground +2
structure.30
It consists of 5 buildings. Each building
has 93 units; 31 units per floor.The 465 units, in total,
can accommodate between 930-1,860 individuals,
depending on the number of persons residing in a
room (2 – 4 occupants per room).The rooms have
a carpet area of 144 square feet and do not include
attached bathrooms. Instead, the design provides for
two communal washrooms per floor. It also provides for
approximately 3,000 square feet of communal area that
could be used as a dining hall for the residents.31
Assuming that there are 3 occupants per room and that
each occupant pays a rent of INR 500 per month, the
investor can expect a rental yield of approximately 8
per cent.The model also assumes that the rent charged
will be increased at the rate of 10 per cent per annum,
and that 1 per cent of the total revenue will be allocated
towards maintenance of the property. Due to the annual
increase in rent, the developer can expect a rental yield
30. As the dormitory design allows for the construction of a greater number
of rental units on a given piece of land than a model consisting of individual
housing units; the rental revenue offsets the additional costs of the construction
of a Ground +2 structure.
31. The developer may lower costs significantly by not providing attached
bathrooms and individual dining areas; the requirement of laying utilities such as
piping, toilet facilities for each unit is eliminated. It also results in more effective
utilization of floor space and a consequent increase in the number of rooms that
may be built.
The last three sections have dealt with the possibility of
private sector involvement in the provision of affordable
housing, and the use of for-profit models to address
the growing shortfall.Two of the key challenges in this
sector have been identified as the availability of land,
and in the case of peri-urban housing, the absence of
trunk infrastructure such as roads, electricity, drinking
water and sanitation.The last section of this report deals
with specific state initiatives that could address these
concerns and facilitate private sector entry into the
affordable housing sector in peri-urban areas.
36 37

Facilitating
Private Affordable
Housing in
Peri-Urban Areas
Section 05

The acute nature of the housing shortfall has spurred
a number of studies into the manner in which
government policies could be used to incentivize
construction of houses. The recommendations
include greater involvement of State Housing Boards
in developing housing programmes, the grant of tax
breaks to developers of affordable housing, creation
of mortgage guarantee funds, the use of zoning laws
to finance housing initiatives and a wide range of
subsidies (Parekh Taskforce, 2008; KPMG, 2010;
McKinsey, 2010). While such interventions could
prove useful in providing an impetus to housing
efforts across India, certain land and infrastructural
initiatives specific to peri-urban areas could go a long
way in addressing the needs of private affordable
housing in such areas.
Locating affordable housing projects in peri-urban
areas brings with it a unique set of challenges. It
necessitates the juxtaposition of the land needs
of persons associated with emerging industrial
clusters with the requirements of those involved
in agricultural pursuits. In addition, the issue of
providing infrastructural facilities in areas that
tend to be poorly serviced assumes paramount
significance.
Land Availability
In India, land laws have been used extensively as a
tool to increase access for the poor (Besley& Burgess,
2000).An elaborate structure of welfare legislation
governs transactions involving agricultural land,
which determines the extent of land that is available
for non-agricultural application in peri-urban areas.
Several states, including rapidly industrializing ones
like Maharashtra32
, Gujarat33
and Karnataka34
restrict
the sale of agricultural land to persons who are not
agriculturists.These regulations are not uniform
across states. In fact, in certain cases, there is lack of
uniformity even within a state.35
In an attempt to balance competing needs, a few
states have carved out an exception to this rule
of restricted sale.Where the purchaser intends to
convert the land to‘bona fide industrial use’ (as
defined in the relevant legislations), such a purchaser,
being a non-agriculturist, may be permitted to
acquire agricultural land. Housing for workers is
covered by it, if it is an extension of a manufacturing
or processing unit for which such agricultural land
has been purchased.
Facilitating Private Affordable Housing in
Peri-Urban Areas: State Interventions to Increase
Access to Land and Infrastructure Facilities
32. Sec. 63, Bombay Tenancy and Agricultural Lands Act, 1948.
33. Sec. 54, Saurashtra Gharkhed, Tenancy Settlement and Agricultural Lands
Ordinance, 1949; Sec. 63, Gujarat Tenancy and Agricultural Lands Act, 1948.
34. Sec. 80, Karnataka Land Reforms Act, 1961.
35. For instance, while the Saurashtra Gharkhed, Tenancy Settlement and
Agricultural Lands Ordinance, 1949 is applicable to a part of Gujarat, the rest of
the state is governed by the Gujarat Tenancy and Agricultural Lands Act, 1948.
The norms prescribed by these two legislations are not entirely analogous.
Stand-alone housing projects in such areas do not
come under its ambit.36
Land is available only to
the extent that the industrial unit sees merit in
providing housing to workers.There is little scope for
a housing market to develop outside of the largesse
of the employer/owner and little scope for private
participation in the housing mission in such areas.
A further set of restrictions on sale are applicable
in some states when the owner of the agricultural
land is a landlord, i.e., he is not cultivating the land
himself and has let it out to a tenant.37
As a process,
the sale becomes complex, time consuming and could
adversely impact land availability for housing projects.
The resulting delay in project execution has a direct
impact on the internal rate of return and the viability
of the project.
To augment land availability in peri-urban areas,
incremental changes to the existing regulatory
framework may be in order. It may be prudent for all
states that place fetters on sale of agricultural land to
non-agriculturists, to adopt a more expansive version
of the‘bona fide industrial use’ exception for such
areas – a version which includes affordable housing
projects for industrial workers on a stand-alone
basis.There is also a need to study the impact of the
restriction on sale of agricultural land by landlords
in industrialising areas, in order to ensure that the
benefits of such restriction are not offset by the ill
effects on land availability for other needs.
36. Sec. 63-1A, Bombay Tenancy and Agricultural Lands Act, 1948; Sec. 63AA,
Gujarat Tenancy and Agricultural Lands Act, 1948.
37. Sec. 64, Gujarat Tenancy and Agricultural Lands Act, 1948.
Town Planning Initiatives
In order to circumvent the profusion of unplanned
sprawls, states such as Gujarat have adopted town
planning initiatives.The GujaratTown Planning
and Urban DevelopmentAct, 1976, mandates the
preparation of a Development Plan at a macro level and
of Town Planning Schemes (TPS) for smaller portions of
the area under development.This approach makes peri-
urban land available for housing and other uses while
simultaneously ensuring that infrastructural support is
put into place.
The Development Plan includes within its ambit land
use zoning, road network and transportation, water
supply, sewerage and storm water drainage, provision
for green areas and other such amenities.A detailed
TPS is structured through a complex, participatory
process in order to bring the Development Plan
to fruition.This process involves reorganising land
parcels, while setting aside land for public uses and
infrastructure development (Ballaney, 2008).This
approach could ensure inclusiveness without having to
completely displace landowners through land acquisition
- acquisition that would conventionally deny them the
benefits of development that have accrued from their
very land parcels.
Among other programs, the land banks created through
town planning initiatives could be employed for
affordable housing projects such as the models proposed
in this report.
40 41

Infrastructure Facilities
According to the High Powered Expert Committee
Report on Indian Urban Infrastructure and Services
(2011),“the state of urban service delivery in India’s
cities and towns is far poorer than is desirable for India’s
current income levels.” Existing government policies
and programs may be modified to achieve the dual ends
of addressing this concern as far as it relates to peri-
urban areas, while simultaneously incentivizing additions
to the stock of affordable housing.
TheAffordable Housing in Partnership program (AHP)
was a part of the Jawaharlal Nehru National Urban
Renewal Mission initiative, and now dovetails into
the RajivAwasYojana framework (MHUPA, 2011c).38
Under theAHP, eligible housing projects are entitled to
assistance from the Government of India to the extent of
INR 50,000 per dwelling unit, or 25 per cent of the cost
of all civic services proposed in the project, whichever
amount is less.This assistance covers a
range of civic services including water supply, solid
waste management, sewerage treatment facilities,
rain-water harvesting and electricity lines (JNNURM
Mission Directorate,Web-site LastVisited on
September 30, 2011).
The government could provide impetus to the
involvement of the private sector in the creation of an
affordable housing stock by extending this subsidy to the
proposed housing models located in peri-urban areas.39
As the models situate affordable housing projects in
proximity to industrial complexes, the likelihood of the
dwelling units being used by the intended beneficiaries
in the EWS/LIG segment is significantly higher. It
would, therefore, be possible for the government
to better target its funding and reduce leakages of
the subsidy amount. Further, the discussion below
demonstrates that such an initiative would make such
projects accessible to a wider cross-section of the poor.
Table 5.1: Cost Structure for Type 2 Unit
Data Source: Pilot Housing Project
Cost Component Percentage of Total
Land 28%
Infrastructure 12%
Construction 60%
38. The Rajiv Awas Yojana (RAY) is a program instituted by the Government
of India aimed at the creation of slum-free cities and states. This programme
includes within its scope not only the upgradation of existing slums but also
the prevention of the growth of new ones. In order to achieve this objective,
RAY recognises the need to engage the private sector in creating affordable
housing stock, on ownership as well as rental basis, with the provision of civic
infrastructure and services (MHUPA, 2011a).
39. The Affordable Housing in Partnership program has largely been designed
for projects in which the land for construction has been supplied by the state.
Projects, therefore, need to meet stringent criteria in order to be eligible under
this program. While the guidelines permit projects constructed on private land to
be considered under it as well, the same set of eligibility requirements have been
made applicable to such projects. Where land has been acquired at market rates
and through market processes, these various stipulations (such as the minimum
number of dwelling units that must cater to EWS households, price ceiling and
the minimum size of each dwelling unit) tend to make the project unviable.
Further, for such projects, the key incentive for participation in the program is the
infrastructure assistance provided. As land has not been obtained at subsidized
rates, it may be advisable to re-examine the extent of infrastructure assistance
permitted in such cases.
Figure 5.1: Impact of State Infrastructure Provisions on Cost
of Type 2 Unit
311,000
289,402
305,663 306,256
279,321
320,000
310,000
300,000
290,000
280,000
270,000
260,000
250,000
240,000
230,000
220,000
210,000
200,000
All infrastructure costs paid by developer
Sewage infrastructure cost paid by Govt.
Water infrastructure costs paid by Govt.
Road infrastructure costs paid by Govt.
All infrastructure costs paid by Govt.
Data Source: Projection based on Pilot Housing Project
40. We have considered the cost of providing water, sanitation and road
connectivity up to the gate of the project. The developer would continue to
provide the inner roads. We have not considered the costs of the electrical
connection as part of this analysis because most peri-urban areas close to
industrial clusters have access to electrical grids.
The Impact of State Provision Of
Infrastructure – An Extrapolation from
the Rajkot Pilot Affordable Housing
Project
The infrastructure cost for a housing project is largely a
function of the extent to which there is state provision
of infrastructure in the area. In the case of the Rajkot
housing project, infrastructure cost (which included the
provision of roads, water and sanitation) accounted for
about 12 per cent of the total cost of the project.
The figure above indicates the extent to which the cost
of theType 2 unit at Rajkot would change if the state
were to provide infrastructure.40
The cost of providing sanitation facilities for theType 2
homes was about INR 15,000 per unit, and posed the
most significant cost in this case. Inclusive of sanitation,
provision for water and roads, if the state were to
provide the trunk infrastructure, the cost of the unit
would drop by about INR 32,000.Assuming that this
benefit is passed on to the buyer, households earning
as little as INR 6,200 per month could potentially own
houses.
A targeted set of policy interventions could, thus, widen
the scope for private sector participation and extend
the accessibility of private affordable housing to a larger
group of beneficiaries.
Monthly Income Expenduture on Housing Total Loan Amout House Pirce
(80% of the house)
14000 5600 5,08,588 6,35,736
MIG 12000 4800 4,35,933 5,44,916
1000 4000 3,63,277 4,54,097
8500 3400 3,08,786 3,85,983
7500 3000 2,72,458 3,40,573
7000 2800 2,54,294 3,17,573
LIG 6500 2600 2,36,130 2,95,163
6200 2480 2,25,232 2,81,540
6000 2400 2,17,967 2,72,458
5000 2000 1,81,639 2,27,049
4000 1600 1,45,311 1,81,639
EWS 3300 1320 1,19,882 1,49,852
2700 1080 98,085 1,22,606
2500 1000 90,819 1,13,524
Table 5.2: Home Affordability Based on Monthly Income for Optimal Model (INR)
Loan Period (Years) - 20 Income Percentage - 40 Interest Rate (%) - 12 Down Payment (%) - 20
CanAffordOwnershipCannotAffordOwnership
42 43

The growing shortfall in housing is a serious challenge,
the scale of which makes the success of any single
approach difficult. Private sector driven solutions
are constrained by the economics of urban housing
markets and real estate prices.The formal private sector
struggles to provide housing at affordable prices in the
central region of large urban agglomerations because of
high land prices. On the other hand, housing situated
far away from employment opportunities and social
infrastructure is unlikely to induce much demand.The
opportunity for the private sector is to identify outlying
areas or Out Growths, which provide potential residents
proximity to employment centres, access to schools,
hospitals and other forms of social infrastructure,
but where real estate prices allow construction of
affordable units.
The Pilot Housing Project in Rajkot demonstrates that
private affordable housing can be made accessible to
households classified within the LIG category on an
ownership basis, while providing attractive returns
to commercial investors.A close study of the project
reveals three distinct success drivers:
Business Model
The private affordable housing development model
used in Rajkot is distinct from the one employed
by firms constructing high-end housing. In the case
of high-end housing, developers bank on land price
appreciation, staggering out sales in order to profit
from the appreciation on assets. In contrast, the Rajkot
model treats land as inventory, where good returns
are dependent on the developer’s ability to achieve
operational efficiency. Construction costs are defrayed
from advances collected from home-buyers, which
requires a high percentage of pre-sales. Comparatively
low profit margins mean that this is a business
that becomes more attractive to investors when it
achieves scale.
Location
As discussed above, location is the key to a successful
housing project.While proximity to workplace emerges
as the strongest decision driver for housing demand,
access to social infrastructure and transport nodes are
particularly significant to low-income families. In the
case of the pilot project, choosing to locate the project
in Shapar, one of the 16 industrial clusters near Rajkot,
Gujarat, ensured effective demand from industrial
worker households.The site is located a mere 300
meters from a main road, providing easy access to a
highway and public transport.The closest village, Shapar,
with a population of 1,212 people, is located a kilometre
away and offers residents access to a school and a
state-run hospital.
Design and Technology
The design of affordable units must be attractive to
buyers while maximizing land value and minimizing
construction costs.The single storey design with front
and back yards, kitchenette and attached toilet fulfilled
these three requirements. Buyers indicated that the
provision of front and back yards as well as the option
of adding a second floor, were key purchase drivers. For
the developer, the trade-off between maximizing land
value and minimizing construction cost translates into a
choice between building low-rise or high-rise structures.
This in turn is a function of land and construction cost.
The added cost of the reinforced foundations, walls
and pillars required for multi-storey construction
Conclusion
only begins to pay off in areas where the cost of land
is higher than INR 700 to 1,000 per square foot. In
general, affordable housing in peri-urban areas should
be single storey to low-rise in order to meet consumer
preferences and be delivered at a reasonable cost.
The choice of technology was again dictated by the
intersection of what consumers might prefer in terms of
look and feel and the material that is most cost effective
for the builder.Traditional brick and mortar technology
is both familiar and acceptable to consumers, while
proving cost effective in the case of smaller projects.
On-site technologies like formwork may begin to be
economical for larger projects.
It has been established that the private sector cannot
provide home-ownership to households earning
less than INR 7,000. If one leaves aside government
subsidy41
, the private sector may only be able to play
housing provider to households in the EWS category
through a rental model.We have proposed two private
rental models, one aimed at EWS and LIG households,
and a dormitory model, both of which offer attractive
returns to investors.
The first of these models is based on the design of
the Rajkot pilot project, and would provide rental
accommodation to households earning as little as INR
2,700 per month.Adding an additional floor to the
ground floor structure, and granting access through an
external staircase creates accommodation for twice the
number of households, and lowers average cost per unit.
If monthly rent is calculated at INR 800, investors earn
an annual yield of over 6 per cent. Further, the business
model includes a provision for exit after a period of ten
years.The return for investors is estimated at over 20
per cent, when project value appreciation is considered
in addition to the rental yield.
There is also a demand for dormitory style housing in
industrial clusters for migrant workers who migrate
for short periods.The proposed dormitory model is
a three-storey structure with 31 units on each floor.
Shared accommodation in 5 such structures would
accommodate between 930 and 1,860 individuals.At a
monthly rent of INR 500, the project would offer the
investor a yield of about 8 per cent. Factoring in a 10
per cent rise in rent per year, the project would yield 17
per cent by year ten.
The models for ownership and rental described above
are purely private for-profit models which are viable
without government support. However, there may be
a case for creating an enabling environment for private
sector involvement in industrial housing provision. It
may be advisable to revisit restrictive norms on the sale
and use of agricultural land in areas witnessing rapid
industrial growth, especially those on the cusp of the
rural-urban classification divide.This report suggests
certain incremental changes the current regulatory
framework to address this issue as well as issues such
as the lack of trunk infrastructure such as piped water,
roads and sanitation facilities.
While it seemsthat the private sector models may never
address the needs of the millions who live in absolute
poverty, innovative business solutions can provide value
to a larger section than is currently served.The way
forward must lie in collaborative efforts between the
private and public sectors to ensure more efficient and
cost-effective delivery of housing services to the poor.
41. Some form of government subsidy may indeed be necessary if one is to
address the entire housing shortfall of 24.7 million. However given the potential
for misappropriation and subsidy induced market distortions, we have steered
clear of solutions involving direct subsidy, except in the case of infrastructure
provision. The argument there is that infrastructure may be considered a public
good given its non-rival and non-excludable characteristics.
46 47

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Appendix 1: Choice of Technology
The CEMS Survey ofAlternative Construction
Technologies forAffordable Housing (2011) assessed
various technologies used by developers for the
construction of low cost housing.The following four
criteria were used for this evaluation:
a) Cost of materials
b) Cost of equipment
c) Labour cost
d) Lead time (i.e., the time required for construction)
For the purposes of this analysis, traditional brick and
mortar has been treated as the benchmark, and each
alternative technology has been compared with it, in
order to gauge the suitability of the new technology for
affordable housing projects.
The alternative construction technologies can broadly be
classified as Off-site and On-site. In the case of‘off-site’
technologies, building components are manufactured
and transported to the construction site for assembly;
whereas in the case of‘on-site’ technologies, building
panels are created and assembled at the construction
site itself. In the table below, we compare the costs of
material, labour and equipment as well as the lead time
of two off-site and one on-site technology, with the costs
of using of brick and mortar.
Off-Site On-Site
Brick & Mortar AAC Bricks Prefab Panels Formwork Concrete
Material 100% 110% 120% 95%
Equipment 100% 100% 140% 100%
Labour 100% 90% 60% 70%
Project Time 100% 90% 40% 50%
Percentage price comparison of construction technologies
The 3 alternative technologies that were assessed were:
• Off-site
oAutoclaveAerated Concrete (AAC) Bricks
o Prefabricated panels
• On-site
o Formwork concrete
Off-site construction technology
AutoclaveAerated Concrete (AAC) Blocks
Key features of the AAC BlocksTechnology
• Cost of acquiring technology – Initial capital
costs are extremely high.The basic plant costs
approximately INR 250 million / USD 5 million.
• Construction time - Less than brick and mortar as
AAC blocks are larger and factory finished.
• Labour – As the blocks are larger than regular
bricks, the developer can save upto 15 per cent in
labour costs.
• Construction Cost - AAC blocks are not priced
competitively in India.They are 4-7 times more
expensive than regular bricks. However, there are
savings in the use of cement.AsAAC bricks are
larger than traditional bricks, the amount of mortar
cement used in construction is lower.
52 53

Prefabricated Panels
Key Features of Prefabricated Panels
• Cost of acquiring technology – Initial capital costs
are high.The smallest mobile production plant
available costs approximately INR 50,000,000.The
manufacturing plant requires a minimum area of 5
acres.
• Labour - Highly skilled labour is required to
assemble the prefab panels, leading to increased
costs. However, savings of up to 40 per centcan
be achieved due to the rapid pace of construction
and the reduction in overall numbers of skilled and
unskilled labour required.
• Construction time –Prefabricated panels can be
assembled quickly and can cut down construction
time drastically. Structures using SIP panels can
be erected in as little as one day and can reduce
construction time by as much as 60 per cent.
• Construction costs –The developer would save on
costs, as the foundation for the structure need not be
as strong or as deep as in the case of traditional brick
and mortar buildings.The hollow walls make service
set-up very simple and cost effective.
Prefab construction (the use of prefabricated panels) is
a method of using building blocks (walls, floor and roof)
manufactured in an off-site factory and transported
in a knock-down condition to the site, where they
are assembled. Prefab construction helps in reducing
construction time by almost half and offers flexibility in
terms of design.
There are 2 types of prefabricated panels.
1. Prefabricated Engineered Boards
The Prefabricated Engineered Boards (PEB) are
lightweight and reduce the depth and strength of the
foundation required for the building.They are more
durable than conventional building materials and are
also fire and rust resistant. PEBs are widely used in
developed countries and are finding their way into
developing countries such as India.
PEB boards have low or almost negligible
maintenance costs and the modular structure of
the panels make replacement of damaged panels
relatively easy.While the initial investment in PEB
may be 17-20 per cent higher than brick and mortar,
the saving in energy costs, the reduced construction
time and the low maintenance costs justify this
investment.
2. Structural Insulated Panels
Structural Insulated panels (SIP) consist of 2
components – the core panel and the external
panels placed on either side of the core.The core
panel is made out of expanded polystyrene laminate.
Its thickness varies between 2 and 6 inches.The
external panels are made of Oriented Strand Boards
(OSB) or other materials such as sheet metal,
plywood, and cement.The components are built in
factories off-site and are delivered on-site ready for
assembly.
The quality/finish of this product is easier to control
as it is manufactured using specialized equipment.
This factor also reduces the finishing cost of the
building. However, there are a few downsides to
this technology.The acceptability of hollow wall
structures, wooden/steel panels to end users can
be an issue in India.As the panels are made from
wood or other materials with shorter life spans, the
buildings constructed using such panels will not last
as long as brick and mortar structures.After-sales
maintenance and repair of the panels would also be
expensive for buyers of affordable homes.
Prefab wall panels are made using waste materials such
as‘fly-ash’ or‘Phospho-Gypsum’.They are considered
green as the panels are 100 per cent recyclable and
have the lowest levels of embodied energy amongst
manufactured walling products. However, prefab
construction is a viable option only if the panels are
sourced from a distance no more than 250 kilometres
from the construction site.
One of the main issues with the use of all off-site
technologies is the cost of transporting the materials
from the manufacturing plant to the site of assembly.
Knockdown homes have a very high volume to weight
ratio and involve high transportation costs. Given the
dependence on road transport and the high fuel costs
in India, the use of off-site building materials may not
always be viable.
On-site Construction Technologies
Formwork
Key Features of Formwork Panels
• Cost of acquiring technology – Initial capital
costs are high.The minimum investment is
INR 20,000,000. For formwork technology to
be financially viable for an affordable housing
project, the minimum built-up area needs to be
around 250,000 square feet. If the developer is
constructing a multi-storey structure, additional
investment will be required, in the form of cranes,
to allow the movement of the panels around the
project site.
• Labour –Formwork technology can reduce labour
costs by 30 per cent. However, it requires the use
of skilled labour which could be an issue in India.
Training new labour would also be expensive.
• Construction time– Certain formwork
technologies can reduce construction time by 50
per cent.
• Construction costs–The finishing of formwork
structures is of high quality, reducing or negating
the need to plaster concrete walls.
Formwork technology has caught the eye of many
developers.This technology makes use of a temporary
structures or panels as a mould to pour in the
concrete and to provide support and shape to the
concrete until it dries and hardens into place.Thus,
‘face contact material’ is put into place and supported
by‘bearers’ to make a hollow cavity to pour in the
liquid concrete.The use of formwork technology
reduces construction time. It also reduces wastage of
material.
Four varieties of formwork technologies have been
discussed below.
1. Western Formwork
2. Modular Formwork
3. Tunnel Formwork
4. Plaswall™
1.Western Formwork
Western formwork consists of pre-fabricated metal-
frame modules made from steel or aluminium.The
formwork panels are arranged in a sequence to form a
part of the structure of the house.A similar sequence of
panels is arranged on the other side in parallel to form a
cavity.The cavity is filled in with reinforcement (steel)
for the final structure.Wet concrete is then poured
into the cavity to form a wall/panel/flooring. Once
the concrete has hardened the formwork panels are
removed.The panels can subsequently be re-used for
building another structure.This technology can be used
for the construction of low-rise and mid-rise structures.
The initial investment required to acquire this
technology makes it infeasible for many affordable
housing projects.
2. Modular Formwork
Modular formwork uses high strength and lightweight
aluminium panels that are fixed into position by a
‘pin and wedge’ system.As this technology does not
require the panels to be supported or‘braced’, it
allows for faster assembly of panels.The panels used
for constructing walls are fastened tightly using wall
ties made from high strength materials.The decks and
ceilings are held into position using beams and props.
The modular formwork panels are manufactured in
standard sizes and can be re-used.This technology
claims to reduce construction time by 60 per cent and
also reduces wastage of materials.
As is the case withWestern formwork, the modular
formwork requires high capital for investment, which
makes it unviable for affordable housing projects.The
NileValley Project, developed by Janapriya Engineers
54 55

Syndicated and situated in Hyderabad, provides an
example for the use of modular framework in India.This
project uses‘PERI’ formwork systems manufactured in
Germany.
3.Tunnel Formwork
Tunnel formwork can be used to construct a load
bearing wall or a slab in a single operation and in one
daily cycle.This technology makes use of project specific
designs, which allows for a reduction in construction
time. Once the concrete hardens the result is a
reinforced structure that requires very little finishing.
This technology can be used in the construction of
low-rise as well as high-rise structures. It is well suited
for projects that require repetitive designs such as
blocks of residential homes, hotels, prisons and student
accommodations/dormitories.
Due to the project specific nature of this technology,
it is unviable for an affordable housing project unless
the project is of a very large size or the design of the
buildings is replicated in multiple projects.
4. Plaswall™
The panels in Plaswall™ formwork are made from
fibro-cement boards which are connected using plastic
specifically designed for this technology.The concrete is
poured into the cavity and the panels are not removed
once the concrete has hardened.
Sterling Construction and Development Corporation
owns this technology. It has been used in the
construction ofTanajiMalusure City (TM City).
Plaswall™ reduces construction time by 40 per cent.
This technology can be used for building load-bearing
structures, thus enabling the developer to construct
ground plus structures. Further, this technology does
not require the use of highly skilled labour.
Summary of Findings
• Using the appropriate modern technology can make
housing more affordable by reducing the cost of
construction, primarily by
o (i) reducing the lead time and the cost of labour,
o (ii) minimizing finishing costs and the costs of
installing services, and
o (iii) streamlining quality control.
• Although alternative technologies may reduce the
cost of a project, they tend to require high initial
capital investment.To justify the investment of
capital in such technology, the developer must
ensure that the technology is re-usable and that the
project is of a scale that would off-set this initial
investment.
• Modern construction technology is most efficacious
when used in large development projects with
simple and repetitive designs.
56

Indian School of Business
Gachibowli, Hyderabad - 500 032 AP, India
Ph: +91 40 23007000 Fax: +91 40 23007017
eamil: cems@isb.edu, www.isb.edu

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