By Mona Jalota
Affordability, the term can mean different things to different people, especially in the Indian real estate sector. Even different countries have different parameters of affordability. However, a common description could be residences that have been developed for the economically weaker section (EWS) and Lower Income Group (LIG) in order to facilitate opportunities for them to own a property. The affordable housing includes the area which is a maximum of 300 sq ft carpet developed for the EWS and between 300 sq ft to 600 sq ft for the LIG. It also considers that the EMI should not exceed more than 30 – 40% of the gross monthly income. Affordable housing becomes a key issue especially in developing nations where a majority of the population cannot buy houses at the prevailing market price.
India’s housing shortage at the beginning of the 12th Five-Year Plan (2012-17) was estimated at 18.78 million units, according to a report by the Ministry of Housing and Urban Poverty Alleviation. The economically weaker sections (EWS) and lower-income groups (LIG) account for 96% of the urban shortage. The market potential of affordable housing projects in the country is expected to touch Rs 6.25 trillion by 2022 due to demand emanating from a growing population and the disparity that exists between household income and high real estate prices. Despite the sharp drop in sales in recent years, demand remained strong for low- and mid-income housing in most large and smaller cities, with both sales and project launches faring better in this segment as compared to their premium counterparts. Therefore, robust demand coupled with inadequate supply is leading an environment full of opportunities.
Government Initiatives for the developers
The government has granted infrastructure status to affordable housing which has ensured an easy and dedicated access to institutional financing and a higher limit on external commercial borrowings. These will now benefit the developers as cheaper sources of funding. On the other hand, long term financing at lower rates, and tax subsidies such as a 100 % deduction in capital expenditure incurred for development of an affordable housing project will reduce costs of construction for developers allowing them to pass on benefits to consumers. Under the budgetary provisions, developers will now get one year’s time to pay tax on notional rental income on completed unsold residential inventory. Affordable housing developers will now also get more time for project completion. The deadline will increase to five years, up from the current three years. The developers will also get the benefit of a shorter tenure, of 2 years, for capital gains to be considered as a long-term gain, from the earlier tenure of 3 years. This will drive activity in the sector.
Home buyer’s incentive
As announced in the Budget, infrastructure status for affordable housing will be a good thing as it will make homes cheaper and spacious. Measurements of the housing units have been specified, to make this scheme more attractive and to ensure homebuyers got value for money. Now Carpet area (excluding public areas such as lifts, corridors) of 300 and 600 sq ft will be counted instead of the built-up area to make the affordable housing more spacious and attractive to the home buyer.
Developers so far have been reluctant to foray into affordable housing segment despite high demand which is likely to be attracted by the ease of access to capital at lower (because of affordability) rates and tax incentives. This will be made possible by laws which will make it mandatory for financial institutions to lend to developers of affordable projects – and that too at low rates. Developers will, in all likelihood, pass on the benefits to homebuyers. Some further benefits include credit-linked subsidy for housing loans for the economically weaker section (EWS) and the low-income group (LIG) under the Pradhan Mantri Awas Yojana (PMAY) and the additional income tax deduction for interest on home loans of up to Rs 35 lakh. The recently-announced interest subvention of 3% and 4% on home loans of up to Rs. 9 lakh and Rs. 12 lakh, respectively, under the PMAY (Pradhan Mantri Awas Yojana) will further reduce the net cost to the buyers.
Non-availability of affordable tracts of land, lack of focus on providing decent amenities within the affordable housing projects, and the prohibitive distances of these projects from the hub of economic activity are a few of the challenges that need to be addressed.
(The author is Director-International & NRI, Residential Services, Colliers International India)