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Our guest today is Rajesh Krishnan. He's
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the CEO of Brick Eagle Group uh located
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in uh Mumbai, India. Uh it's a developer
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of affordable affordable housing in
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India. Rajes, thank you so much for
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joining us at knowledge at Wharton.
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It's my pleasure. Thank you.
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Uh now understand your background is
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actually in banking. How did you get
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interested in affordable housing?
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Um actually brick eagle is more a
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financial services platform for
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affordable housing. Uh what we really do
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is connect capital with execution
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capability. So to that extent actually
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my my background in banking is extremely
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helpful. Um see while affordable housing
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is always known as a huge um depressing
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social need and an opportunity um the
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fact is there's a disconnect between
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capital and execution capability. And I
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happened to just stumble into it. I
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started investing in affordable housing
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in my personal capacity and that's when
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I learned that the risk adjusted returns
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in affordable housing is actually
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superior to many other asset classes out
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there. So at one stage I just decided to
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do it full-time.
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Okay.
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So we we'll come back to the to the
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returns but before we do that could you
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tell us a little bit about the housing
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market in India and spec specifically
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the need
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for uh affordable housing?
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Sure. How how big is the market?
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As you know, MKul, we have over a
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billion people in India. Everybody needs
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a roof over their head. Um there are
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various studies by McKenzie, Deutsche
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Bank and all written on this topic. Uh
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but I'm told the demand for affordable
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housing is over 5 million units every
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year in India. Today we are short of $20
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million. But then it's a growing problem
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because of urbanization, right? So the
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annual housing demand is 5 million
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units. Um however the important point is
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supply is minuscule compared to that
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right so we're not even there at 10% of
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demand and as a result in a place like
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Mumbai as you know over 50% of people
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live in slums and substandard
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accommodation so it's a huge deal
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uh what is uh brick eagle's strategy to
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fulfill part of this demand and enter
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this market
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sure um see essentially we realize that
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the guys who want to do affordable able
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housing typically lack access to
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capital, right? And we started as a land
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banking company for affordable housing
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because we realized that what they need
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money for is usually to buy land, right?
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So we started investing in lands for
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affordable housing development. Soon we
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basically realized that the value chain
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for affordable housing is broken. So we
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decided to invest in developers and
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service providers in the affordable
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housing value chain. Right? And now we
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are looking to set up a housing finance
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company to also fund home buyers. Yep.
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So in a sense we are basically making
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investments across the value chain. So
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we are able to take it from start to
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finish.
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So I understand you recently celebrated
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your fourth anniversary.
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That's right.
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Uh can you tell us a little bit about
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some of the major milestones and what
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you've been able to accomplish so far?
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Uh sure. Um so as a for a 4-year-old
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company we today manage about,250 acres
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of lands which when fully developed will
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house about 88,000 families. Um we
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spread across um Maharashtra, Tamil Nadu
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and Gujarat through three states. Um
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today we have a team of 400 people uh
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doing this. Um last year we delivered
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1,00 houses. As a group we've delivered
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about 4,000 houses so far but then we
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are slowly ramping it up. This year the
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target is to deliver 5,000 houses but I
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surely hope we start doing 10,000 50,000
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houses uh you know within the next 5
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years.
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Uh who would you say is your main
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competition Rajes and how does your
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approach differ from theirs?
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I don't look at anybody as competition,
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right? U I look at everybody out there
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as partners. You got developers, you got
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private equity shops, you got
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construction technology companies, you
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got various people out there, but what
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we find is everybody out there is
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missing some piece of the puzzle, right?
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So what we really want to do is
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basically plug those gaps and help those
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guys deliver scale, right? For instance,
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um recently we incubated a developer in
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in um in Puna, right? U they have access
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to funding. They are very good at
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construction, but they don't understand
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branding and distribution, right? So we
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put together the branding and
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distribution strategy for them, right?
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On the other side, we just recently made
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an investment in another developer in
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Gujarat. Uh they're actually very good
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de developer. They actually they won the
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award for the best affordable housing
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developer of the year and they've
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already delivered 3,000 houses. But they
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needed capital to scale up, right? So we
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told them, look, you run operations, let
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me take care of finance for you, right?
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So we actually look at ourselves as a
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plug-and-play service to essentially
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help others deliver scale.
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So what it seems to me from what you're
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saying, Rajes, is that what you're doing
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is leveraging the entire housing
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ecosystem.
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That's right. uh and and your goal, if I
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understand it correctly, and please
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correct me if I'm wrong, is to deliver
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houses uh that would cost the customer
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around $5 to $10,000 in that price
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range. Could you explain your approach
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of how does leveraging the housing
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industries ecosystem and the technology
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ecosystem allow you to develop houses at
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that kind of prices?
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Uh sure. I would like to make a small
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distinction here um between affordable
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housing and what we call social housing.
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Right? Affordable housing in my mind is
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a market-based solution uh for housing
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the middle and low-inccome segments. And
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there the trick really is to make small
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format homes livable, right? Because
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this is a market-based solution. It it
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is so the per square foot rate is a
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market rate. So the key value driver of
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affordability is size. So we put a lot
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of thought into making a 300 ft² home
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livable, right? So there basically the
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design the interiors and and all the
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amenities and stuff like that has a huge
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impact on the way the product is
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designed. But then the point that you're
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touching upon is what I would call
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social housing right because when we say
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India needs 20 million homes today all
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all the demand is is in the less than
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arguably $15,000 price point right $5 to
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$15,000.
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So there um essentially you need a
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radically different approach right
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because this segment per se is not so
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profitable. So you need to actually come
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up with some kind of product process or
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financial engineering to cater to this
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need, right? Like people like Habitat
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for Humanity are doing a wonderful job
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on the process engineering in terms of
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sourcing materials, labor at subsidized
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rates, right? Um but then the where we
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want to focus on is financial
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engineering. Um see today when we do
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affordable housing, we our investors
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seek 3x return in five years. That's
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about a 25% annualized return for them
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to be able to invest in affordable
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housing. But I'm saying if you have
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access to capital from impact investors
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who are happy with 5% annualized
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returns, we can use the benefit of low
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cost of capital to subsidize housing for
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the poor, right? And it turns out if you
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just get money at 5%, we can deliver
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houses at5 $10,000 in scale in the
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outskirts of Bombay. That's to me is
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like magic.
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So who are your investors today? are
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they primarily impact investors and uh
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what is your pitch to them as you uh aim
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for higher scale?
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Uh what sort of a pitch do you make to
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impact investors?
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See, so far we've been going to
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commercial investors. The pitch to them
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has been look um let's invest in lands
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for affordable housing development. So
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it's for you it's a fully secured
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investment that will target a 3x return
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while serving a pressing social need.
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Right? So that's the pitch we've been
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giving so far and we collected some 40
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$45 million on this pitch right but now
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what we are very excited about is
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basically doing social housing for at
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the bottom of the pyramid right and for
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that we need to go to essentially
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endowments foundations impact investors
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right um who are who are basically happy
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to take a slightly higher risk for a
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slightly lower market return right we're
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not asking for charity uh we're saying
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we'll actually make 5% returns or 10%
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the need be Right. Um there we got our
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first check for a pilot project from a
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from a family office in India. It's
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actually the times of group in India uh
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who gave us 20 cr rupees that's about $3
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half million uh to run a pilot right. Um
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but then we think there is a lot of
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money available from impact investors
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globally especially from institutions
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pension funds in Europe right banks who
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have allocation for social impact and so
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we want to reach out to them this year.
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Well the flip side of any investment
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opportunity is always the risk.
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Uh so uh any red herring document
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outlines them. So what do you see as the
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primary risks of investing in affordable
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housing in India? Um look it's India so
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you can get hit from all directions so
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you just have to watch out. Um see but
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then it's it's mainly idiosyncratic
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risks if you ask me. Um so people often
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ask me hey you know what about cost
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escalation? What if u you know what if
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you're not able to get material on time,
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cement on time, construction technology?
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To me all of that is nice. You can have
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you know it can erode into your profits
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but you're not going to lose your shirt
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right
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those are all execution risks
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correct right but then most projects in
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India get stuck for two other reasons
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right not because of engineering process
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reasons it's mainly um it's fair to say
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majority of projects in India are stuck
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because they ran out of money right so
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financial closure is very important
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ensure that you're backing the right guy
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who has access to funding right um the
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second would be just idiosyncratic risk
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Right? So because the legal framework is
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fragile. So if you go to court, it can
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take 20 years to settle a lawsuit.
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Right? So you got to just stay away from
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shareholder disputes, local disputes,
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you know, and you know just you know
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keep it clean, right? No, I I
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understand. Considering that you are
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aiming at uh social housing, have you
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made any efforts to reach out to
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organizations like H uh Habitat for
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Humanity or even you know there are so
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social entrepreneurship foundations like
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Ashoka. Have you reached out to any of
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them to for support?
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Interesting you mentioned this. um
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Ashoka actually identified housing as a
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pressing social need about four or five
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years back and they've done phenomenal
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work and we met them and um so
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essentially what they were doing is that
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they was aggregating demands at the
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grassroot level and encouraging
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developers to supply right and turns out
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many more lot of developers were not
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interested in supplying at those price
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points right so we flipped the problem
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the other way around we said look this
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these are the areas where we can supply
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can you please aggregate demand for us
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here so we can ensure that it goes to
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the most deserving and beneficiaries.
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So, we're working with them and in fact
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we're just talking to them about
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partnering together to set up the social
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housing fund. Right? On the other hand,
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we're also speaking to Habitat for
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Humanity on how we can potentially
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partner because in essence our goals are
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the same. We both saying can we enable a
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million homes in the next 15 20 years
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and they realize that with their current
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approach they may not be able to hit
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that number in India right so we saying
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hey maybe if you know combined forces
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there's a good possibility we can make
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it happen
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right so so uh brick eagle has completed
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four years uh where do you see yourself
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in the next four years
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next four years um actually the next 10
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years is actually easier question to
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answer next 10 years
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right um see essentially we got a
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two-prong goal on one side uh we are
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saying hey can we deliver 1% of India's
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housing need right that turns out to be
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like a million units in the next 20
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years right so which by the way is like
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a herculan task right so we set
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ourselves to achieve that goal right so
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that's our stated goal we want to
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deliver 1 million units in the next 15
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20 years right on the other side also
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and done we are a market player right Um
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McKenzie says affordable housing is a
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hundred billion dollar market
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opportunity right and with as with every
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market we think the top 10 20% of the
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players are going to have the 80% share
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right so we we want one of our invest
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companies to be there in the top 10
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right in the next 5 10 years right and
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right now as far as I can see the field
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is wide open there is no front runner
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right and so I think we have a decent
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shot at it
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great uh one last question Rajes that is
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uh based on your experience with
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affordable housing so far what can
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developers of other affordable housing
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projects in different parts of the world
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learn from break eagle.
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Ah um that's a difficult question. So
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see it's a it's a very local play right.
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Um one thing I would say is always have
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a local partner um for every place that
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you go to. uh interestingly for instance
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right home you know one of the biggest
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affordable housing developers in the
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world they came to India they spent five
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years they couldn't launch a single
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project right so so I mean while they of
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course know the game there are huge
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local barriers to entry um so in a way
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recognize the fact that you need to have
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local partners to execute and that in a
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way is also been the reason why a lot of
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modern developers corporate developers
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in India have not managed to scale up
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and
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because the decision- making is very
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centralized. So this is a very local
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game. You need to have a local guy out
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there taking the decisions on the fly.
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Yeah. Um so that would be uh one
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important learning I would say. Um but
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yeah, affordable housing is a global
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need. So there is enough to play.
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Well, good luck to you Rajes and thanks
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so much for joining us at knowledge at
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Wharton.
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Thank you so much. It's a pleasure.
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[Music]
