Novel approach to low-income housing

India’s rapid growth has led to a demand-supply mismatch in many areas. IFMR Trust seeks to fill such supply chain gaps in key sectors through its Network Enterprises Equity Fund. By incubating specialised supply chain companies (called network enterprises), the Trust hopes to build ‘networks’ of enterprises in identified sectors.

IFMR Trust’s Vocational Training Network Enterprise (VTNE) has invested in the Hyderabad-based STRiVE (read a related story here), which is filling the gap between huge demand for entry-level jobs in the services sector and the desperate need for jobs among rural and semi-urban youth. Aarusha, a company mentored by IFMR Trust, takes this initiative one step further. It provides affordable housing solutions to people who migrate from rural and semi-urban areas to cities, to work or to study, and simply do not have the money to buy a house or even rent one.

The demand-supply gap

There is a huge mismatch between demand and supply in India’s housing sector. Government estimates put the shortfall at 47.43 and 26.53 million houses in rural and urban areas respectively, by the end of the Eleventh Five-Year Plan in 2012. Over 90% of this shortfall is in the low-income segment, leading to the spread of slums in urban areas, which, today, house around 100 million people.

This number is bound to increase in the coming years. India’s economic growth has created more informal and contractual job opportunities than openings in the formal and organised sectors. In the 1990s, the number of informal and self-employed workers who migrated to urban areas increased by 360%. Housing remains woefully inadequate for these people who are neither 'poor' nor 'rich' enough to be customers in the exorbitantly priced urban real estate market.

It is this need that Aarusha Homes Pvt Ltd seeks to meet. The company's objective is to be "a leading housing solutions provider for low-income customers in the country". And the promoters have all the credentials to meet that objective.

Utpal Sharma, co-founder and Director, is an architect and urban planner with 25 years of experience in teaching, drawing up and implementing urban development plans, implementing large-scale housing and infrastructure projects, and research. He is currently Dean of the School of Planning and Public Policy, at the Centre for Environmental Planning and Technology (CEPT) in Ahmedabad.

Dyan Belliappa, also co-founder, currently based in Bangalore, is an architect and urban planner with 17 years of experience in designing and managing the construction process of campuses, institutions, resorts, restaurants, worker housing and independent homes.

V Satyanarayana (Satya), Aarusha's CEO, holds a master’s degree in housing planning from CEPT, Ahmedabad, and a bachelor's degree in civil engineering. He was Project Finance Advisor at the Slum Upgrading Facility (SUF), a global facility of the United Nations Human Settlements Programme (UN-HABITAT) to attract domestic and commercial capital into slum and urban upgradation in Asia and Africa.

Conceived by these three experts, with support from IFMR Trust, Aarusha intends to be a supplier in the rental market as well as an intermediary in urban mass housing projects.

The initial focus is on the first market, and the approach is simple: Aarusha has opted for a traditional solution -- low-cost dormitories -- and redefined it.

One of the clean, well-maintained dormitories run by Aarusha Homes

Redefining dormitories

While low-cost dormitories in urban areas are generally crowded and dirty, with minimal amenities, Aarusha offers shared accommodation that is clean, safe, well maintained, and comes with basic furniture, a fan, and a toilet. The price tag is not steep. "Our price range is between INR 800 and INR 2,800 per month, depending on the location, room size and services attached," says Satya.

Aarusha’s offer has many takers. Starting operations in Chennai in August 2008, the company has, till date, around 1,500 customers in Hyderabad, Chennai and Bangalore. Most are young people from rural areas who are undergoing employment training or working in the three cities. The rest are students from villages and small towns.

Business models

Aarusha is exploring three kinds of business models, explains Satya. In the first model, it buys inventory from existing hostel providers and supplies it to aggregated customers. In Hyderabad, Aarusha identified 22 existing hostel providers who could house around 900 children of self-help group members from rural areas, in the age-group 19 to 26 years, sent for training under the state government’s Employment Generation and Marketing Mission (EGMM). As suggested by EGMM, Aarusha partnered with EGMM’s training partner Skylark to provide the trainees accommodation.

Satya sees a lot of scope for expansion of this model. "We see scale from corporate and government sectors. In addition to the partnership with Skylark, we are working directly with EGMM and are in dialogue with other EGMM training partners." Aarusha is also talking to a security agency that employs 4,500 rural youth in Hyderabad, and a state government agency that is keen to provide accommodation to port workers, he adds.

In the second model, also initiated in Hyderabad, Aarusha set up dormitories in partnership with existing hostel providers, with shared investments and risks. Three dorms were set up this way, with a total of 370 beds. In two cases, an existing hostel was bought; the third was built. In this model, the customer pays slightly more -- around INR 2,000-2,800 per person, per month, inclusive of food. Aarusha’s margins are also higher.

In the third model, tried out in Chennai, Bangalore and Sriperumbudur, Aarusha set up its own hostels -- four dormitories with a total capacity of 170 beds. Accommodation is offered at INR 800-INR 1,250 per person, per month, without food. In this model, Aarusha loses most on non-occupancy. Says Satya: "We will use this model as a last resort in situations where there are no existing hostel providers, or if partnerships with them don’t work out."

Finding suitable property to provide shared rental accommodation on a large scale is one part of the business. The other is finding customers for the accommodation. Wholesale customer mobilisation -- as happened in the case of Skylark and EGMM -- is the best and most cost-effective option. But Aarusha has also tried distributing pamphlets, inserting advertisements in newspapers and on websites like Sulekha, Magicbricks and 99acres.com. "Word-of-mouth publicity also works well, especially with students," says Dyan.

The offer made to customers is that of a basic living space with amenities like electricity, water, a bathroom and toilet, and television, in a clean environment. Customers have to give an advance of one-fourth the rent payable (property owners are, however, given rent in advance). The responsibility of regular rent-collection lies with Aarusha; with bulk customers, collection costs are negligible. Nevertheless, Satya admits, sometimes cash flow bottlenecks do occur.

Future plans

IFMR Trust has offered strategic management and incubation support to Aarusha. Negotiations are on to provide debt capital for Aarusha’s expansion. The company hopes to come up with shared accommodation for 5,000 people in the three cities of its current operation, by early 2010.

Indeed, Aarusha has ambitious expansion plans. There is huge demand to be met. There is also a fundamental business driver. "Our model works on volumes rather than margins," Satya explains. If it tried to do otherwise it would fail to meet its basic purpose -- providing people with a clean, decent, affordable place to stay.

Top