Setback for home buyers, Narendra Modi government’s affordable housing push hits high land costs hurdle

By: and | Published: February 22, 2017 5:41 AM

The government's recent tax incentives will not be enough to move the needle in favour of affordable housing as land prices continue to be exorbitant, feel real estate developers and analysts.

 

Some companies already present in the affordable segment said supply will only increase in a meaningful manner if larger companies participate. What might discourage big players is a heavy cost overrun.

The government’s recent tax incentives will not be enough to move the needle in favour of affordable housing as land prices continue to be exorbitant, feel real estate developers and analysts. In the Budget, the government said that the affordable housing segment will now have infrastructure status, making it a priority sector for lending. Following the previous year’s announcement when it allowed 100% deduction in profits for projects with apartments measuring up to 30 sq metres in the four metro cities and 60 sq metres otherwise, the finance minister also clarified that such areas will now be calculated in terms of carpet area.

“The move will not be as effective as it is being made out to be as land prices are too high, especially within city limits” said Ashish Shah, COO at Mumbai based, Radius Developers.

Given that residential sales are at a six year low, as per December data, it is only logical that land prices also show signs of correction. However, even financially healthy, Tier I developers like Oberoi Realty are finding it tough to take advantage of the current down cycle. During its recent results conference call, chairman and managing director, Vikas Oberoi said although this is an opportune moment to buy new land parcels, despite proposals, he is waiting for deeper cracks in prices.

You May Also Want To Watch:

Land typically constitutes 70% of a project cost. In affordable housing, margins are far more compressed compared to luxury products hence it becomes an even more important consideration. Besides, building smaller sized apartments, as mandated by the government will necessarily mean the FSI (floor space index) is not most optimally used, said Shah. This means, there is loss of space in the project, which could otherwise be monetized.

Some companies already present in the affordable segment said supply will only increase in a meaningful manner if larger companies participate. What might discourage big players is a heavy cost overrun.

“Return on capital is low, approvals can take two to three years; this is a huge gap and will deter bigger players to invest,” said Rohit Poddar, managing director at Poddar Housing, which builds apartments priced under R30 lakhs.

Land deals have come down to a trickle not just due to high land prices but also because there is no equity funding available, which aid companies to bid for land. An estimated 80% funding currently being funneled to the sector is through structured debt. With coupon rates as high as 18% to 22%, companies will not use funds to buy land, especially in the absence of pre-sales, which allowed an instant cash flow.

That said, the government’s push through tax rebates will egg large developers to partially convert existing projects. “In a city like Mumbai, there is a strong demand for smaller apartments because families are nuclear and the category of single people is also burgeoning,” opined Amit Pachisia, chief credit officer at Altico Capital. An attractive ticket size might persuade fence sitters, he said. But it might be unrealistic for large companies whose DNA has been luxury apartments to overhaul entire strategies in favour of affordable housing, said Neeraj Sharma, director at Grant Thornton.

To be sure, companies were already trimming apartment sizes in order to make them more affordable whilst holding up benchmark rates. Last year, a JLL, India report said apartment sizes, on an average, have shrunk by 27% in the MMR (mumbai metropolitan region), by 24% in Bengaluru and Kolkata, by 22% in Chennai and by 10% in the NCR (national capital region) in the past five years.

Radius Developers itself launched a 350 sq ft product in one of the most prominent central suburb, Chembur.

“I have seen a few proposals similar close to the specifications of 30 sq metres even before the budget announcement,” said Pachisia. But these are minor tinkering to mobilize stagnant sales and won’t change supply in the measure anticipated, sector specialists concurred.

In the past, real estate companies have tried out affordable housing projects in peripheral city limits. “Historically developers have been able to price projects at truly affordable rates in areas like Boisar and Palghar but those have not met with much success,” said Pachisia.

Wide expectation that the pushing affordable housing will move demand to the fringes of the city might be unfounded. “Even if supply escalates in areas like Karjat, Kalyan etc, the middle income group, for whom apartments measuring 60 sq metre will be attractive won’t move due to lack of social infrastructure in those areas,” said Maju Yagnik, vice chairperson of Nahar Group.

Get live Stock Prices from BSE and NSE and latest NAV, portfolio of Mutual Funds, calculate your tax by Income Tax Calculator, know market’s Top Gainers, Top Losers & Best Equity Funds. Like us on Facebook and follow us on Twitter.

Switch to Hindi Edition