“A car that ordinary Americans can afford.”

Henry Ford with his Model T

For nearly a century, that thesis has appealed to automotive titans, of whom the latest is from India, as reported in the Financial Times:

Indian companies want to repeat the success of the low-cost Tata Nano, the world’s cheapest car, by designing homes affordable to the nation’s hundreds of millions of slum dwellers.

Henry’s heir? The Tata Nano

Ever since Henry Ford harnessed mass production to the horseless carriage, architects and builders from Frank Lloyd Wright’s Usonian house through George Romney’s Operation Breakthrough, whose history is so important it deserves its own future post, but for now, consider this:

“By relying on mass construction, assembly line techniques, and factory-produced materials, Romney’s projections indicated that Breakthrough could build between 250,000 and 350,000 units of low income housing annually.”

Breakthrough was the brainchild of George Romney, who came out of the auto business as CEO of American Motors:

Henry’s spiritual heir, seeping America with affordable cars

A man whose current reputation falls short of his many contributions, Romney as HUD secretary (in many ways the political predecessor to Jack Kemp) led the charge of rebuilding America’s cities after the 1967 and 1968 riots.

Taking back the cities, with technology and mass production

Breakthrough failed miserably, but that has not stopped visionaries from seeking the replicable, affordable house. We’ve seen, at great length, that mobile homes (another progeny of the automobile adapted to housing) deliver an affordable box but have an enormous vulnerability to loss of land tenure rights and, being immobile in fact if not in law, they are no guarantee of long-term affordability.

Tata’s plan is different: a mass-produced house, with secure tenure and land ownership, on a greenfield site:

Tata Housing Development, a unit of the Tata Group – maker of the Nano – has begun its first ultra low-cost development selling homes ranging from 283 sq ft to 465 sq ft [Roughly 26 to 43 m² -- Ed.] priced at between Rs 390,000 ($8,200) and Rs 670,000 ($14,000).

As we will see, part of Tata’s approach is an integrated financial value chain that incorporates land purchase on the front end and consumer/ home asset finance on the back end.

One-stop shopping: land, house, financing

The great advantage Tata brings is the ability to deliver massive scale and to pick up the economies of standardized along the way.

“We hope to show the world that a private-sector initiative aimed at the bottom of the pyramid can make money,” said Brotin Banerjee, managing director of Tata Housing.

Actually. Mr. Banerjee and Tata are not at the pyramid’s bottom, but at its lower trapezoid, a classic emerging-market population sector.

That middle trapezoid is still very large

Except he’s aiming at the lower trapezoid, not the bottom.

India’s housing shortage is fuelled by the immigration of millions of villagers to the cities.

The income band is commonly called ‘aspirers’

As India rises, aspirers and seekers become a huge market

In this century of cities, aspirers and seekers will migrate to cities, there find work, and there generate wealth. With that wealth will come an explosion in housing demand, because as people become less poor, they want to consume more space per person.

Tata Housing calculates India needs at least 24m homes if it is to house all its people living in slums.

That number has to be a huge under -stimation of the demand; I assume the FT lost relevant data along the way.

However, many slum-dwellers are not destitute by local measures. Tata estimates 180m Indian households live on between Rs 90,000 and Rs 200,000 a year ['Aspirers' in the lexicon – Ed.].

At Rs 40 this is $2,250 to $5,000 annually.

Housing at Tata’s new low-cost development – Shubh Griha, or “Auspicious Homes” – in Boisar, about 60km from Mumbai, comes with electrical, toilet and plumbing fittings built in.

Sixty kilometers is a long way from Mumbai, so the housing won’t be occupied by people who work in town; rather, they’ll be part of the ever-expanding greater Mumbai.

Here’s what Tata is advertising:

Salient Features

* 1 Room Kitchen and 1 Bedroom-Hall-Kitchen flats available

* Integrated township with school, playground and hospital facilities

* Easily accessible from Boisar railway station and NH8

* Ground +2 buildings with beautifully landscaped courtyards

* Eco-friendly green development with water harvesting facility

* Large community centre, convenient shopping and hawking zones

* Sufficient storage space inside the apartments

* Good quality interior fittings

* Landscaped gardens

Gleaming high-rises in a verdant landscape – it has to be CAD/CAM

As against that shining vision, here’s a sample Mumbai low-income co-operative, in the Mankhurd part of town:

The Mankhurd property is much closer to town than is Shubh Griha

The 3,000-unit development, which targets households earning Rs 9,000 to Rs 10,000 a month, will also have schools, a hospital, shops and a recreation centre.

It’s encouraging that Tata is incorporating diversified uses into their newly-built communities. The greatest mass-produced housing subdivision catastrophes have been failures not because of the physical construction or even the initial sale/ occupancy, but out of monomaniacal use concentration that made them into dormitories of the poor rather than working communities. By contrast, successful mega-development properties from Starrett City on down have integrated active communities uses – retail, social, religious – right into the community itself.

Make the street into a shopping arcade, and then women, children, and the elderly follow

Result: community! Mankhurd, Mumbai

There’s no doubt of the demand:

Tata said it had received 5,500 applications with deposits for the first phase of the development, which will be completed by 2011.

Tata is able to get people to put down hard equity up front, long before there is anything but a vision, because the company has a well-deserved and hard-earned reputation for delivering on its promises. That reputation brings it cost savings throughout the whole value chain:

To reduce its capital requirements, it has developed a business model in which it forms partnerships with landowners and only pays them once the house buyers begin to pay.

Very cool. Land value is a residual – meaning it’s what is left over after you subtract the cost of building housing from the value of the housing when built.

By forming an equity-sharing partnership with the landowners, Tata reduces its carrying cost for the land (resulting in a lower net price to the home buyers) and offers the landholders a share in the effective profits resulting from the massive increase in density by going up and up.

Go up twenty stories, result increased land value!

That’s why the value of urban land is so much higher than rural. Tata is sharing that value bang with the land sellers and with the home buyers. Clever.

Henry Ford’s assembly line was a physical value chain.

Tata’s approach is a financial value chain.

1. Recruit landowners up front, attracting them with your credibility and promise of profits, and securing their urbanizable land.

2. Recruit buyers up front, attracting them with your credibility, and securing their hard equity.

3. Build standardized unit using economies of scale.

4. [Probably] finance the buyers’ purchase, using your large corporate lines and ability to securitize to deliver low-cost loans.

I hope it works. India needs lower-cost mass-produced housing around its mega-cities.

Where will he live? Mankhurd boy

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