Euphoria of Affordable Housing
Knight Frank India Pvt. Ltd, in a research report, highlighted a surge in affordable housing projects. Homes below Rs. 50 lakh price comprised 71% of the total launches between January and June 2017. The question is will affordable housing rising sentiment sustain itself.
With an estimated slum population of about 65 million and another 0.9 million homeless people in urban India, the industry status to Affordable Housing sector and Housing for All by 2022 seem to be the important government thrust for urban areas. However, affordable housing holds various meanings depending on the different demographics, the cost of living index and the specific micro markets of the city. In Indian context, affordable housing is usually considered as the housing for the economically weaker section (EWS) and (Lower Income Group (LIG). Also, affordable housing is seen more of a social need rather than an investment option or lucrative business model.
The Subsiding Enthusiasm
With industry status and associated easer funding options as well as policy incentives, the affordable housing construction is set to attract private developers to this segment in a big way. Some of the measures to boost affordable housing include –
- Setting up a dedicated affordable housing fund under the National Housing Bank (NHB)
- Under the Pradhan Mantri Awaas Yojana (PMAY) allocation of Rs 23,000 crore to complete 10 million houses by 2019 for those living in kachha houses
- Tax benefit for builders that provide houses up to 30 sq mt carpet area within municipal limits of the four metros and 60 sq mt for other locations completed within five years of approval instead of three years.
- Interest rate subsidy of 4 per cent for loans up to Rs 9 lakh and 3 per cent on loans up to Rs 12 lakh
With all these measures, the government hoped to see a rush of private developers towards constructing affordable housing. However, the response turned out to be lukewarm. To provide houses within the affordable price range, the developers have to construct on cheaper land parcels away from the city centres or on the city’s peripheries. But such areas lack transport connectivity, social infrastructure like schools, colleges, hospitals, shopping complexes, etc.
Examples of empty low-cost housing units have emerged in various citiesdue to lack of infrastructure which is the responsibility of the government. So, it seems like a vicious circle for affordable housing developers, as the costly land in city limits drives housing prices up and the cheaper land in city suburbs due to lack of infrastructure sees no buyers. Another primary challenge is that most of the affordable housing projects are being taken up by small local developers. The institutional funding agencies are sceptic of providing funds to them or partnering with them.
Other challenges can be summarized as the lack of fast-track approvals for affordable housing projects, insufficient tax incentives for developers of affordable housing, reduction in municipal fees for affordable housing projects and inherently thin profit margins. Due to all these factors put together, only a few large real-estate developers have shown interest in foraying in the affordable housing construction segment.
Research has shown that when slum dwellers are rehabilitated in distant geographies, then more often than not they choose to come back to their slums due to the reasons of lack of employment and uprooting from familiar circles and social network.
Affordable Housing for Middle-income
In a recent revision, the Union government increased the carpet area of houses under the affordable housing scheme. What came as good news for the middle-income homebuyer was the increase in the carpet area from 90 to 120 sq. m for the income category (Rs. 6-12 lakh/annum) and from 110 sq. m to 150 sq. m in the income category of Rs. 12-18 lakh/annum. For middle-income homebuyers it means access to bigger houses at lower costs and for developers, the rise in demand for their large unsold inventories.
However, the dampener for the sentiment has been the high GST on under-construction property at the rate of 18% on two-thirds of the value of the under-construction property. Then there is the additional registration fee and the Stamp duty levied by respective state governments at the rate of 5-8 per cent. The incessant demand of homebuyers and developers to reduce GST on housing still has not been addressed.
Thus one step forward and another step backward by the government have ensured that the property rates remain beyond reach for the large base of home buyers of middle-income group. On the other hand the quality of affordable housing provided by the government has been low, that refrain this income group buyer from investing in them. The government housing boards in various states release limited inventory that too by lottery system. It is imperative that government understands housing as a necessity and not a luxury to be won in a lottery.
While housing for the bottom of the pyramid EWS and LIG is absolute essential, affordable housing also has to mean affordability for the major chunk of demographics that is the middle income group. Despite being economically better, they struggle to find good quality budget homes in Rs. 35-50 lakh range within the city or near the city centre.
Righting the Wrong
A city that cannot provide homes to its large population of working middle class with budgets not more than Rs. 40-50 lakh, it surely has deficit of affordable housing. Providing cheaper homes at the city peripheries with minimum basic social infrastructure and hardly any capital appreciation is not a viable option for such homebuyers.
The quality of so called affordable housing by government or private developers also remains debatable. Affordable housing does not have to mean cramped apartments without amenities. It should offer good quality construction, well-planned housing units with natural light & ventilation and basic conveniences like a park or a play area and club with elementary recreational facilities.
Also, many developers with land parcels in villages surrounding the cities construct affordable housing there and later on get in legal hassles on account of the land being in green zone. Developers are also wary of creating the infrastructure around their project to attract homebuyers to their projects away from the city. They consider it putting the cart in front of the horse. The infrastructure such as roads, electricity, water and sewage supply should be ready for the developers to construct housing. And it becomes developer’s responsibility to market the project and bring the residents to that locality.
There is sufficient business rationale for affordable housing projects for EWS as well as the Middle Income Group (MIG) where the demand is consistently growing. However, investing in affordable housing sector is a play on volumes and time. This segment becomes attractive for developers only if a sizeable number of units are developed and sold in a particular time frame so as to make profits. This calls for large supply, speedy approvals and reduced construction period and faster sales. Adopting value engineering is an effective way of cutting down the costs (by 15-20 per cent) related to the construction, design and maintenance.
Also, the Government should consider in situ up gradation so that residents can stay within or ner their social circles and work place. This also alleviates the encroachment on green land parcels beyond the city limits as well as may entail lower cost of construction and acquiring lands. As on August, 2017, only 2.2 per cent of the total approved housing under PMAY-HFA was for in situ development
A ray of hope has been the GST Council’s recommendation of a concessional rate of 12% on the two-third value of under-construction properties has been extended to the houses constructed or acquired under the Credit Linked Subsidy Scheme for Economically Weaker Sections (EWS); lower-income group (LIG), middle income group-1 (MlG-1) and middle income group-2 (MlG-2) under the Housing for All (Urban) Mission or PMAY(Urban) and low-cost houses up to a carpet area of 60 sq. m. The new GST rate on these houses would be 12%, with one-third abutment for land cost; resulting in an effective rate of 8%.
Rental Housing Alternative
Rental housing balances the housing shortage and is a smart solution to absorbing floating population of a city. It offers an alternative to buying expensive property and provides additional housing stock. Thus it is only fair, that the government should come out with policies that encourage property owners to rent out their houses. However, RERA missed the opportunity of addressing the renting/leasing laws and providing stringent guidelines as in the case of sale & purchase of property. Indian rent control act differs from state to state making it less informative and more complex.
Union territories and more urbanized states of Gujarat, Maharashtra and Andhra Pradesh have a higher percentage of rental housing. In Bengaluru, 60% of households rent and the highest share of rental housing is in industrial and IT corridors.
The paradox in the Indian context is that 11 million housing unit lie vacant that could have taken off some of the housing pressure. This is by itself little is more than half of the housing shortage estimated in the country.
A better use of existing housing stock in addition to creating new capacity is a global phenomenon used to provide housing to urban dwellers. The success of rental housing depends partly on rental income that can provide sufficient returns to property owners and secondly on the transparent and favorable rental laws that create an amicable environment for both the landlord and the tenant.
The government proposes to launch a house rental scheme known as “Rent to Own” as a component of the National Urban Rental Housing Policy, which the housing ministry will anchor. As per the scheme, the migrants in cities will be able to take a house on rent from government bodies for certain years and subsequently they can own them by paying the entire cost in easy installments. Once the model Act is notified, states can adopt it. This will be a key supplement to the ‘Housing for All’ scheme of government.
While a significant policy-driven growth is still needed in the affordable housing segment, owing to the demand in this segment, developers of such residential projects will see sustainable business model. “The growth in affordable housing is attributed mainly to the large population base, the large proportion of middle and lower income population and the increasing number of nuclear families,” said R. K. Arora, Chairman, Supertech Ltd.
The developers are now creating projects that are a mix of affordable and mid-segment homes to capitalize on both the volume and value-based business potential. The combination of developers own financial resources, bank funding as well as sale-generated revenue has worked well for the developers.
As per Amit Bhagat, CEO & MD, ASK Property Investment Advisors, “Demand is robust in mid segment for dwelling units less than 50-75 lakhs in metros and up to 30 lakhs in other cities. Unfortunately supply was not focused on these segments and hence the absorption was slow. Now real estate players have started focusing on these segments but unfortunately the locations where supply is being planned do not have social and physical infrastructure.”
Ssumit Berry, Managing Director, BDI Group expressed his point of view on affordable housing development, “Affordable housing is a major challenge in developing nations where a majority of the population is not able to buy houses at market price. Income of people is the primary factor in determining the affordability. As a result it became responsibility of government to manage the rising demand for affordable housing.”
Sandeep Shah, Partner, N. A. Shah Associates LLP believes that the definition of affordable housing should consider the location of the project as size of the unit & price of the unit is dependent on the location. He said, “Currently in metro cities, even a 300 square foot (carpet area) will not be available within the definition of affordable housing provided by The Ministry of Housing and Urban Poverty Alleviation. Also, there have been instances where the ready reckoner rates are higher than the price at which transactions are concluded resulting in artificial demand for stamp duty and also the difference between the Ready Reckoner rates and the transaction value resulting in income tax outflow as for tax purposes, the Ready Reckoner rate is treated as sale price. Also since stamp duty is not subsumed within GST, the cost of purchase increases for the buyer,”
Concurring to the thought, Ashish R Puravankara, Managing Director Puravankara Limited emphasized on the need to understand the difference between ‘Affordable Housing’ and Low – cost homes. “The concept of affordable housing is to offer aesthetically designed high quality homes with premium features, at an economical selling price. This is the primary differentiator between affordable and low- cost housing. The challenge is to balance affordability without compromising on the quality. The other challenges include availability of land.”
Ravi Ahuja, Senior Executive Director, Mumbai & Developer Services at Colliers International India said, “In this segment of housing, it will be crucial to see how the government innovates to support timely execution, passing on incentives offered to developers, to end users / customers, tax benefits and lower interest rates. Only a confluence of all these factors and more, across Indian geographies can make the distant dream come true. A major issue for private developers is the scarcity of low-cost land. This has forced the developers to keep their pricing at the higher side in order to recover their costs and meet the margins.”
Touching upon another crucial aspect, Ram Walase, MD & CEO, VBHC commented. “Home financing is a challenge for the people employed in informal sector. In our projects we see 5-10% customers who seem to have capacity to service a home loan but do not have adequate income proof, documentation or formal / measurable credit standing and consequently are unable to buy a home. Measures like cheaper debt funding options for affordable housing, bringing land transactions under GST so that stamp duties and other costs can be included in the input credit and reforms that will facilitate cheaper FSI / land in corridors with better transportation and social infrastructure could put the sector on the road to progress.”