Foliage Developers: How Developers Choose to Make a Difference

Giving low and moderate income working people the opportunity to buy decent, dignified housing is one of India’s most pressing needs, given the country’s 26 million some-odd housing deficit. By this point, we’ve met several organizations working towards that goal so we feel India’s low cost housing market is starting to pop. At the same time, the thinking about how to do it right is clearly a work in progress, so we have enjoyed surveying “the vision” as it changes across India. Meeting with Nehal Shah of Foliage Developers in Ahmedabad was a pleasure in that regard. Their “vision” was both clear and exciting.

Foliage Developers is a family-owned business, started in 1988. The firm has primarily focused on residential development for high income segments in the past, but the family patriarch’s interest in social development led them to their current experiment in low cost housing construction. Not without some skepticism about whether those clients would be bankable and how Foliage would be able to work with this new class of client.

Local innovation. Nehal credited the assistance of Monitor Inclusive Markets’ Affordable Housing (MIM-AH) team for their unfailing support from the start of this initiative. MIM–AH had worked with Foliage on everything from site selection to design to pricing. MIM–AH is a good example of how to build on local innovation and entrepreneurship with the support of organizations like MIM that have access to information and networks, as well as the mandate to think strategically about the links between social needs and market models for delivering much-needed products and services to the base of the pyramid.

Foliage’s first low-cost housing development at Vatva was about half sold when we met, with the project awaiting building permits and bank approvals. The company had already put up a model house for marketing. This development would be essentially the lowest cost housing available at Rs 281,000 per unit (USD 7,000 approx. at Rs. 40/USD). The development would be 400 units with apartments starting at 250 sq ft and going up to 350/400 sq ft.

Financing. Foliage’s buyers at Vatva face the challenge of finding financing for their apartment purchase. This is complicated by their work status. As day laborers making less than Rs 10k/month, they may currently live in informal housing and pay on average about Rs 2,000/month. Some buyers may be slum dwellers with undocumented income and no tax paperwork. These borrowers wouldn’t generally be able to get a loan from a commercial bank or a housing finance company, but organizations like Micro Housing Finance Corporation and DHFL are developing this business niche quickly (see our interview with MHFC).

In this case, the homebuyer deposits Rs 10k, 20k or 30k and, after 60 days, pays 30% of the total cost. The remainder is financed by a bank or Foliage on a monthly basis. In India, as elsewhere in the developing world, demand is so overwhelming that customers are willing to put money down and take the construction risk that banks refuse to take. Unfortunately, disreputable developers can defraud buyers in this way or squeeze buyers for more funds as they run out of money to complete the development. The fact that the people least able to bear these risks are forced to is one of the stubborn injustices of the market.

Site location. The Vatva location is significant. The land acquisition was simplified by the fact that the parcels were non-agricultural, urbanized and ready for development. Yet, Nehal admitted that the land price was higher than expected. Although not in Ahmedabad proper, the location was chosen because of the industrial activity nearby so that workers could live close by their jobs.

This in itself is a great illustration of the subtleties of using inclusion and sustainability as guiding principles. On the one hand, allowing workers to live nearby their jobs should be positive from a sustainability and livability perspective – fewer car or auto trips or shorter bike rides and walks (as is often the case) and less time spent in commute, a major cost suffered by many low and moderate income workers. Of course, the industrial enterprises around Vatva likewise have the responsibility to act as responsible environmental stewards so that living near work will be a healthy experience.

Business model and profitability. Foliage is a perfect example of the trade-offs that forward-thinking developers are making – investing in developing a business model for low-cost housing now with a mind toward improving it iteratively and improving their IRR over time. As a first project in low cost housing, the profitability on the Vatva project will be much lower than on other projects, which usually return more like 40%, but still in the teens. The business could take this lower rate of return as an investment in making future projects more of a high turnover, low cost manufacturing process. Should it work out, Foliage will substantially increase its investment in the business and continue to develop their model, potentially experimenting with mixed use development as a means to finance maintenance.

Building technologies. This project only uses conventional building technologies with filler slab technology (not concrete). Although pre-fab construction would take less time and perhaps entail higher quality, it is expensive and only makes sense for a development of more than a thousand units.

Just as a note, pre-fab is something that builders occasionally use in India. Pre-fab is both a time and labor saver and can raise the quality of the building envelope, but the practice would not be consistent with India’s labor surplus economy. Still, if builders need to build to high quality and energy efficiency standards, then either contractors and workers will have to be better trained or, eventually, they will have to make the process more capital intensive.

Green materials and environmental design. Foliage had found it difficult to reconcile consumer demand with green building. Their clients haven’t been willing to pay extra for green building. At the high end, people are more accepting of the design changes and willing to accept higher project costs. We had also discussed this with Sanjay Prakash about T-ZED in Bangalore where the premium for green building was absorbed by buyers (see our interview with Prakash).

Still, Foliage is working on environmental design elements to lower costs for customers, among which are fly ash bricks and hollow blocks. Exteriors are always an issue with low cost housing because of rapid deterioration of the materials. Also, these materials require customer education to avoid potential misuse and eventual dissatisfaction. These are all added costs for the developer.

Surat EWS Housing

Surat EWS Housing: only 6 mos old with well managed common areas but exterior finishes already worn

Another concern is how to prevent resource wastage, like water, for instance, by buyers in the low cost housing project at Vatva. Foliage is also considering options for water collection and management systems. The developer would likewise need to ensure that the project’s residents would be able to ensure the maintenance of such features, perhaps by engaging an NGO. These are all issues that Foliage is working to resolve and integrate into their business model.

Livelihoods and social infrastructure. Foliage has a plan to secure the livelihoods of the residents.  There is a growing trend to partner with an NGO to promote community development. More than 30 schools are already in the area, including A/C schools that are more “up-market.” With a mind towards family and community life, Foliage is planning to include community space like a library in this or the next development, potentially as a library, recognizing that social space or study space for children will be at a premium.

Governance. Foliage repeated a common phrase among developers and architects – that of not needing to work with the government. For a developer, working with the government and weaving through the JNNURM process was seen as difficult and lengthy and, so, costly as well. We heard once again that streamlined clearances from government to build would make an important impact and that corruption was only one small part of the problem. Everyone we talk to also emphasizes that Gujarat is probably a less corrupt place to develop property than other parts of India.

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