According to an Ernst & Young (E&Y) report titled Indian Real Estate: Growth and New Destinations, the residential property market constitutes almost 75 per cent of the real estate market in India in terms of value.

As per the conclusions of the Working Committee of the 11th Plan (2007-12), the total shortage of dwelling units at the beginning of the Eleventh Plan period in 2007 was 24.7 million. "It is estimated that more than 70 per cent of the shortage of dwelling units are for middle and low income brackets," says the report.

This is a segment which is starting to interest developers and investors in India and outside, and some are already eyeing the first movers' advantage.

At the GRI conference in Delhi recently, we spoke to two international private equity funds who are highly interested in the low cost and middle income housing segment.

Walton Street Capital India is working on a Rs 5,000 crore (Rs 50 billion) integrated township project in Uttarpara, close to Kolkata, along with two other partners - Sriram Properties and Starwood Capital.

The project includesabout 28 million sq ft of FSI. This project in Uttarpara, being developed over 314 acres, will include middle income housing in the range of Rs 15-16 lakh.

The managing director of Walton Street Capital India, Sourav Goswami stresses, "You don't ignore that demographic." Panchsheel Developers' Atul Chordia goes further to say that the future of Indian real estate is in low cost housing.

Balaji Rao, managing director of the Starwood Capital Group, feels that a lot of developers are talking about diversifying their asset classes through different geographies.

They should also look at diversifying across various price points. "If you want to be a big player, you can't have a one segment focus," explains Rao.

At the lower end, volume replaces margins. Anuj Puri, chairman and country head of Jones Lang LaSalle Meghraj (JLL-M) feels that looking at the market, it definitely makes sense for developers to get into it.

"It makes perfect sense in terms of volumes that the market is offering. Providing economical housing is beneficial for buyers (in terms of providing more options to choose from) and to developers since the latter can construct more. The demand in terms of units is phenomenal and developers getting into this segment can build for years to come. They have the assurance of sure-shot absorption as well. One must understand that developers are not shifting from high-end to low cost housing. They are only branching out. Most of the big names getting into middle-segment housing continue to build high-end projects," says Puri.

There are two ways in which low cost and middle income housing can be implemented: Either by opting for a stand-alone project or by making this segment a part of the larger, mixed-used development to get cross subsidy. Larger players too are getting interested in the segment now. Many integrated developments across the country have low cost housing as a part of it.

Shapoorji Pallonji is doing a mass housing project, SP Shukhobrishti in New Town, Kolkata, spread over an area of 150 acres for Rs 1,500 crore (RS 15 billion).

The project will have 20,000 dwelling units in the form of 12,000 one-BHK flats and 8,000 two-BHK flats with proposed support facilities such as two primary schools, corner stores, market place, shopping arcade, mini hospital and a child health check-up centre.

According to Rana Gupta, technical director for the project at Shapoorji Pallonji, the company is going to incur a huge loss in this project.

"But we are combining it with a 50-acre IT park very close to the project. This should help cross subsidise the housing project and in the end we expect to make some profit," he explains.

As in any other real estate project anywhere in the world, one of the most important factors for success is the cost of land. Another fund which is keen on investing in this segment is Red Fort Capital Advisors.

The company is actively looking at various cities across India. It will be starting a low cost housing project close to Bangalore very soon and will "actively scout for good parcels of land at good prices" in Kolkata and Hyderabad as well.

"We are looking for large volumes from this segment," says Parry Singh, director, Red Fort Capital Advisors. Red Fort is looking at pumping about $ 40-50 million (Rs 350 crore) in low cost housing in India, over the next year and a half. In Kolkata, it will look at some kind of partnership with the government. Land, in some way, needs to be subsidised by the government, feels Gupta, like in its project in Kolkata.

Singh explains that the land cost needs to be comparatively lower for a low cost housing project but another aspect that should not be neglected is good transportation. Most projects will likely be on the outskirts of cities so the importance of providing or having a sound transportation system cannot be undermined.

The project Red Fort, planned on the outskirts of Bangalore, is very close to a railway station. "In Kolkata, the biggest challenge is good transportation," says Singh.

According to JLL-M, lower income housing can cost as little as Rs 1-2 lakh per unit in schemes started in rural areas and smaller towns.

In the metro context, housing can cost between Rs 8-15 lakh for the lower-middle income group. In Mumbai, there are between 25-30 projects of this type coming up in the Vasai Virar sub region. One can buy a decent 2/3 bedroom flat within such a budget there.

The Lalani Group has been building high-end apartments in Mumbai for many years. Now, Shamsu Lalani, director, Lalani Group, tells us that the company is developing 2 million sq ft of low cost housing in Vasai Virar, which is 45 minutes from the CDB in Mumbai.

"The margins are comparably less in this segment. We might get 15-20 per cent margins in the low cost segment compared to 25-30 per cent in the high-end segment," says Lalani.

The average size of an apartment in his project would be 500 sq ft. Sourav Goswami of Walton Street Capital feels that you could do low cost at a decent price and still make 20 per cent margins on it. "You can do well by doing good. People avoid it because it is not a 'sexy' business," he feels.

Puri feels that as the premium housing segment is generally oversupplied, therefore the more sustainable margins are definitely in the low to mid cost housing segment where the demand is literally limitless. Who said low cost housing wasn't viable?

Innovative construction technologies

The most interesting part about this new found interest in low cost housing is the innovative ways in which companies are trying to cut down on construction cost while at the same time not compromising on quality.

G B Singh, founding partner at Red Fort Capital Advisors, is a patent holder for fly ash-based cellular light weight concrete which the company plans to use in its low cost housing projects in Bangalore and at other places.

Instead of stone aggregate, this flowing concrete with foam and air bubbles is poured into a mould to create the houses. The tunnel from construction process then speeds up activity and then you can effectively build 5-10 EWS houses a day. All this using no skilled labour at all. The technique uses no beams or columns - all the walls are load-bearing.

In this process, 35 per cent less cement is used and overall the total cost of construction is about 10-15 per cent less than any other comparable technology. The structure is completely earthquake proof, water proof and it is much more efficient than a brick and concrete structure, which means heating and cooling load is reduced drastically.

In every way, this is a green technology.

Walton Street Capital has invested in a low cost housing platform which it has successfully implemented in Mexico where it is selling 9,000 low cost homes a year.

Walton Street Capital plans to get that to India as well for future projects in this segment. The technology is a subset of the Mivan technology that is being used in India already. For low cost housing, it uses what is called pour in-situ where houses are constructed on panels which are erected on and then bolted together.