1. Why PEs and NBFCs are showing more interest in residential segment

Why PEs and NBFCs are showing more interest in residential segment

Most institutional players are looking at affordable housing as a ‘mid-margin and quick turnaround’ product to ensure reasonable returns.

Published: May 24, 2017 3:02 PM
The segment witnessed the entry of a large number of developers and institutional players between 2009 and 2013 on the back of strong recovery post the global financial crisis.

By Gagan Randev

The Indian real estate sector has evolved exponentially over the past two decades. The residential segment cornered a large portion of the initial Investment fund flow given its self-liquidating nature and the large demand-supply gap especially across semi-urban and urban areas. The segment witnessed the entry of a large number of developers and institutional players between 2009 and 2013 on the back of strong recovery post the global financial crisis. The market has, however, been witnessing a slowdown over the past 2-3 years with prime residential hotspots such as Delhi-NCR, Mumbai, etc., experiencing a substantial year-on-year decline in housing sales. This has largely been led by increased preference among home buyers for completed and near completion projects with demand undergoing a paradigm shift from being more investor-led to being end-user driven.

FY 2016-17 has emerged as a historic year for the Indian real estate with a number of landmark legislations such as RERA and GST. Affordable housing has further become a massive watchword given the focus the government seems to be paying to it by promoting policies and action to clearly ensure its focus on its mission of ‘Housing for All’ by 2022. This positive sentiment has largely been driven by a host of incentives offered by the government to make the segment more economically viable for both developers and institutional investors. The long-awaited infrastructure status as accorded to the segment under the Finance Bill 2018 is expected to go a long way in enhancing growth of this asset class – allowing easy access to capital at economical rates basis priority sector lending, clearer investment guidelines and greater transparency. Further, the government has tweaked the definition of affordable housing projects to pave the way for 100% tax subsidy on profits of an affordable housing undertaking. Also, the time period of the completion of the projects has been increased from 3 years to 5 years.

Most institutional players are looking at affordable housing as a ‘mid-margin and quick turnaround’ product to ensure reasonable returns. This has been made possible with speedy government approvals and incentives to end-users (especially the first-time home buyers living in rented accommodations to motivate them to own their own dream home). The government has been very proactive on this front as well by introducing a slew of benefits for the homebuyers such as allowing interest subsidy of 3% and 4% for first time home buyers for loans up to Rs12 lakh and Rs 9 lakh, respectively, under the Pradhan Mantri Awas Yojana (PMAY). Further, inclusion of middle class under the scheme’s ambit is envisaged to significantly bolster demand in the segment. Additionally, area norms for affordable housing units have been amended from being calculated basis ‘built up area’ to ‘carpet area’ with the 30 sq. m. limit now applicable only within the municipal corporation controlled areas of the four major metros. Furthermore, affordable housing policies across various states also offer a multitude of supplementary benefits for both developers (additional FAR, zero license and approval fees, additional ground coverage etc.) and buyers (zero maintenance fees for 5 years, check on developers to ensure timely project completions etc.).

For investors who have struggled to cope with the slowdown in the residential segment over the last 2-3 years, the affordable segment is a new beacon of light. The uncertainty of approvals taking too long, developers delaying projects, uncertain demand has made way for an opportunity in a segment where the above pitfalls are much fewer. Besides arms of established players like Shappoorji Pallonji Joyville and Tata Value Homes, etc., which have rebranded themselves to cater to this mass and exciting segment, it has drawn Institutions and Funds like HDFC Capital, IFC, Standard Chartered, Kotak Investment Advisors, etc., which are looking at backing projects in the affordable segment. It is also attracting new entrants to the market like Tribeca Developers, etc., who see an opportunity in this segment. Sovereign funds like ADIA, are also clearly backing the Affordable story by lining up substantial commitments to this segment. It has also opened up doors for smaller developers who have been known to deliver projects on time and earned a good customer recall. These developers are getting the interest of funds which like their nimbleness and lower overheads besides strong customer goodwill which would be crucial in making such projects successful and profitable.

There is no doubt that the future of the affordable segment looks bright for all players in this market. However, there are challenges too which need to be overcome. Firstly, the availability of cheaper land. Unless the supply of more affordable housing land becomes available at reasonable prices, there cannot be real affordability. Secondly, the lack of infrastructure and last mile connectivity around some of these projects is extremely poor and defeats the very purpose. Lastly, it should also cater to the aspirations of the home buyers. The absence of amenities such as car parking, for instance, presumes that a buyer of such units does not own or aspire to own a car. These issues have to be addressed in the near term to make affordable segment a real success.

(The author is National Director, Capital Markets and Investment Services, Colliers International India)

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