Carlyle backs Indian affordable housing firm
The Carlyle Group's $26 million commitment to Value & Budget Housing Corporation (VBHC) last week is significant in that it marks the affordable housing developer’s graduation to the investment mainstream. The company was founded in 2009 by what Shankar Narayanan, head of Carlyle Growth Capital in India, describes as “a team of visionary entrepreneurs.” Their vision involved building one million affordable entry-level homes nationwide in the space of a decade.
Early-stage funding was provided by two investors keen to promote a social agenda in addition to generating economic returns. India Financial Inclusion Fund (IFIF) focuses on sectors that directly or indirectly meet the needs of underserved sections of society. Housing Development Finance Corp. (HDFC), one of India's largest mortgage providers, got involved with a view to addressing the shortage of affordable homes in the country.
The arrival of Carlyle, investing through FCG IX, a division of the $1.04 billion Carlyle Asia Growth Partners IV fund, can be seen as a commercial validation of VBHC's business model. Both IFIF and HDFC committed additional capital alongside Carlyle.
VBHC's ability to attract international funding is based on the progress of Vaibhava, its debut project in Anekal, near Bangalore. Since opening in mid-2010, more than 1,000 units have been sold and the pre-sale of another 900 is due to start in September. All units use renewable energy as well as water and waste management systems in order to minimize maintenance costs.
Most property developers in India effectively invest in land, factoring into final prices the appreciation in land value over the several years it takes to build a project. This accounts for a significant portion of the profit margin. As an affordable housing provider VBHC isn't in a position to hike prices by large increments. Its strategy, devised by company chairman Jaithirth Rao, former head of Citibank India, is to build faster and more efficiently, offsetting lower margins with a higher volume output.
The strategy's success rests on strong interest from homebuyers - and it is estimated that unmet demand for affordable housing in India amounts to more than $200 billion. "The demand for affordable housing will continue to grow quickly due to urbanization, increasing number of nuclear families, rising income levels and strong desire for home ownership," says Wayne Tsou, head of Carlyle Asia Growth Capital.
Local developers including Housing Development & Infrastructure, Puravankara Projects, Omaxe and Tata Housing Development have entered the low-cost housing segment in recent years. On the private equity front, Warburg Pincus in April formed an INR14 billion joint venture with Indian budget hotel operator Lemon Tree Hotels that is expected to develop affordable housing projects.
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