The future of affordable housing in India
RICSIndia | 24 Jan 2011

In the February 2010 issue of Property World, RICS India Country Head discusses the future of affordable housing in India.

 The past year was one of several highs and lows for the realty sector. 2009 commenced with the economic slowdown worsening and growth trajectories of the previous year seeing a setback. With uncertainty playing a key role in driving market sentiment, the one constant feature through the year was the focus on 'affordable housing'.

While India has always been confronted by the housing dilemma, 2009 saw a spurt in activity to house India's poorest. With genuine end-user demand existing within this property segment, several fund strapped developers in an attempt to improve cash flows and liquidity, took up the baton of low-cost housing.

However, as market sentiments are now improving and the realty sector is back on the recovery path, will 'affordable housing' continue to be the mantra for 2010? This is a question that needs to be addressed keeping several factors in mind, especially considering the role of this property segment in the overall framework of the realty sector.

Does the need for 'affordable housing' exist?

Progressively, urbanisation has played a key role in India's housing woes. Presently total urban land is estimated at 2.3% of India's total geographical area, which accommodates 30% of population. Pressure on land and infrastructure is only going to increase further with 40% of the nation expected to inhabit cities by 2020 at which time urban population is expected to be 455 million.

Additionally, with 200 million people anticipated to be living in slums and slum like conditions by 2020, the focus and emphasis is on urban housing. From 2008-2012, the demand for residential space in India is estimated at 687 million sq.ft. The top seven cities account for nearly 77% of this demand with the NCR leading the pack with a requirement of 114 million sq. ft. Chennai and Bangalore on the other hand account for 16% of demand.

These facts reiterate not only the need for a focused policy to lower costs and encourage PPP to accommodate the burgeoning population of India but also the growing need for regulations to simplify the acquisition and conversion of agricultural land for urban use and increasing the present FSI norms.

Is 'affordable housing' clearly defined and is it really affordable?

'Affordability' has crudely been touted as the consumers' ability to purchase. However, this is a relative term that could acquire different meanings under varying circumstances. With the government focusing on the LIG segment, 'affordable housing' is now being measured in terms of property cost to annual household income ratio.

Affordable housing projects work on very different business models, which have a very low cost base. In India, where the price of land, especially in metro/Tier I cities is exceptionally high, due to perceived scarcity, projects incur huge costs with Government regulations forcing the developer to pass most of these incremental costs onto the customer in the form of EDC, IDC, PLC, transaction costs, stamp duties and registration fees.

However, with several developers opting to be part of India's housing revolution, a very different real estate market belonging to the buyer is starting to take shape. Innovative construction techniques with the inclusion of value engineering and better space management are being deployed, to help reduce construction costs by up to 20%. Also, the sector is being given a boost with the favourable mindset of developers along with the government's thrust on infrastructure; continued reform; lower interest rates; and housing friendly policies.

2009 saw numerous affordable housing project launches but is this supply in tandem with demand?

To answer this question, one must understand not only the demand but also consumer perspective. In the absence of adequate levels of research to determine customer preference on size, cost, and location a situation of over supply seems to have set into the market in some locations. Even with several developers flooding the market with projects, buyers opted to stay away, as smaller sized units of 800-1000 sq. ft. as compared to the anticipated 1200-1400 sq. ft. units were being priced in the same bracket of Rs. 25-40 lakhs.

Location of these projects and proximity to civic amenities were other considerations that kept buyers at bay. In fact, in the last few months barely 30-40% of new projects have seen absorption in the market. In some cases stock pile up's in cities such as Gurgaon, Kolkata, and Bangalore are quite extensive and may take 4-16 months to clear.

Over-supply is also being blamed on 'price rise'. While earlier, projects were launched at subsidised rates to tide over the economic crunch, with market sentiments improving and both investor and end-user interest picking up, prices are being revised upwards to improve developers' profit margins. Research firm PropEquity, while analysing 882 projects launched in 13 cities across the country has highlighted that there has been a 10-15% increase in the price of budget homes in the second half of 2009.

What are the imperatives for success of affordable housing segment?

India's housing market has been forecast to grow to $90 billion by 2015 as compared to $12 billion in 2005. Affordable housing is expected to account for 80% of the total housing demand over the next 4-5 years. This is indication enough that this property segment will primarily drive the realty sector.

In fact, the residential segment is already leading the economic recovery of the sector and is expected to bring about progressive solutions for effective implementation of projects through 2010. Some of these include the developers' ability to overcome the challenges of project execution. Presently, builders lack technical and manpower experience in delivering mass volumes as required under these housing schemes.

Additionally, as funds are being diverted to complete projects that were earlier put on hold, subsequent project delays are inevitable. In fact, recent data is indicative of the fact that residential bookings outnumber deliveries in India by a ratio of 10:1. However, this scenario could be reversed with shorter project execution timelines of 24-30 months with developers willing to make lower margins. 

The industry is already abuzz with the anticipation of the upcoming budget and the incentives that both developers and customers could benefit from. Buyers are looking forward to the implementation of the Direct Tax Code that will see an increase in tax exemption limits against interest payment and rental income from the present Rs. 1.5 lakhs to at least Rs. 3 lakhs. Prospective customers are also hopeful that the interest rates will remain unchanged. Developers too are counting on incentives for the introduction of rental housing and relaxation in ECB norms for the development of integrated townships

Considering the stimulus that has been provided to the realty sector, especially in the residential segment, the onus now lies on the developer not only to leverage these benefits to derive maximum returns on projects but also to ensure that these benefits are shared equally with the customer, which would truly make affordable housing a reality.