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How To Make Low Cost Housing Scheme In India Affordable?

Real Estate Investment and Asset Management
Dec 30, 2017 7:18 AM 5 min read
Editorial

Affordable housing or low cost housing remains a key challenge in India. For years now, affordable housing schemes in India have been focused on building homes for the mid and high income customers while neglecting demand from the lower income segment. But there seems to have been a reversal in recent trends . Affordable housing in India is projected to attract investments of $1.3 tr over next 7 years and has finally begun to take center stage in discussions. Government has also started incentivizing low income housing developers and home-buyers in this segment. This is definitely a good sign, yet the question remains – What exactly is affordable housing?

 

As per KPMG, one of the big four auditors & CREDAI, apex body of real estate developers association, income groups can be understood as following:

 

Source: KPMG & CREDAI

Considering the Centre for Monitoring Indian Economy (CMIE) estimates that average Indian’s annual income stands at INR 1.6 lakhs, most population would sit in the first two groups as per the above classification.

 

Now, how does the market classify affordable housing? The two categories widely accepted by the sector are – houses costing up to INR 20 lakhs ($30,000) and houses costing between INR 20-40lakhs ($30,000-60,000).

 

Buyers Perspective – Lack of Affordability

 

Affordability to purchase houses, especially in the metropolitan areas still remains a challenge. To put it in context, affordability ratio (i.e. Median House Price / Median Annual Income) has increased from 4.5x to 5.6x between 2010 and 2015 in Mumbai. The National Capital Region (NCR) is not too far behind either, suggesting that house prices have risen significantly faster than income levels. Increasing house prices continues to worsen affordability while making the dream of owning a home a far-fetched one for many.

 

Source: RBI

Establishing the “Affordable” Price for Each Segment

 

Assuming that housing costs (rents or EMI) are 30%-40% of the household income, and the current interest rates on home loans are 8.5%, one can calculate the house price affordability for each income group.

Source: Statista

On the demand side, we see that 77% of the population can afford houses in the  < INR 15 lakhs category. Contrary to this, as mentioned earlier, the present supply of “affordable” projects mostly fall in the INR 20-40 lakhs category, which caters to a relatively small percentage of the urban population - there is a clear mismatch! For example, in NCR, 75% of the projects launched between 2015-17 were in this category.

 

This raises a key question about the definition of affordable housing as used by the industry.

 

Housing which is not affordable to three quarters of the urban population could not be deemed as affordable housing.

 

Furthermore, classifying projects "launched in suburbs", where prices are low, as affordable projects would be a gross mistake as they do not fulfill their purpose of serving the low income group.

 

Source: Anarock Property Consultants

Suppliers’ Perspective – Lack of profitability

 

From the developer’s perspective, making a business case for affordable housing ( < INR 20 lakhs) remains challenging as well. High land costs in cities, coupled with high construction and financing costs renders this segment almost unprofitable for developers. Based on rough costs of construction for a 40 sq m apartment in Mumbai, the house developer would incur INR c.15 lakhs/unit for construction. Adding to this is the cost of financing, corporate overheads, legal expenses including delays etc. It then becomes obvious why this segment remains unattractive and why most of the launches have been in the INR 20-40 lakhs category.

 

Source: HUDCO

Government’s Current Stance

 

Affordable housing has been a key priority for the current government. There are many policies in place which seek to provide reduced interest rates to buyers, encouraging institutional investments through grant of “infrastructure” status to affordable housing, and focusing on building a supporting eco-system. While the steps taken here are appreciable, these solutions fail to hit the nail on the head i.e. making this business profitable for developers in India.

 

Unless the unit economics for affordable units is favourable ( < INR20 lakhs), developers will shy away from this segment while consistently flooding the market with mid-income housing schemes. Affordable housing in public private partnership (PPP) should be given a strong push, so that low income housing developers in India can acquire and develop land at subsidized rates. Developers should also focus on decreasing their construction costs through economies of scale such as modular construction, aggressively cutting process inefficiencies and using state-of-the-art technology. Developers should be ready to play on volume sales while working on thin margins. Also, given that there is a large migrant labor movement across the country, government could explore rental housing schemes under PPP in order to build more houses – similar to the US multi-family concept.

 

While developers are now moving in the right direction by targeting buyers in the lower to mid income group, there is definitely a mismatch between the industry’s definition and expectation of affordable housing with the ground reality. India urgently needs more quality homes for the right segment, whether they come in the sale or rental form, it doesn’t matter. Unless there is an active collaboration between the industry and the government, the real affordable housing section will remain neglected in our metropolitans.