The reforms and several initiatives by the government have given a major boost to developers to foray into the affordable housing segment.
Given the pace at which India is urbanizing, housing is a much sought-after need of the urban population. At the national level, there has been a scarcity of more than 18.78 million homes in 2012, of which 95% were in the EWS (Economically Weaker Section) and LIG (Low Income Group) segments. As the urban migration continues to grow, with limited headroom in the cities to cater to the housing requirements of the population, that is forcing people to live in informal settlements. This phenomenon has created a huge shortage in the affordable housing, i.e. EWS and LIG, segments. However, most of the upcoming or available supply is beyond the reach of the intended target end-users.
The most obvious reason for this mismatch is the fact that developers are finding it extremely difficult to re-engineer their internal business processes to deliver a cost-effective product to the end-consumers. High land costs, delay in project approvals, and increasing raw material cost translate into low profit margins for the developers. As a result, developers see much more merit in undertaking projects in the MIG or HIG categories where gross margins are much better compared to the affordable housing segment.
Over the past few years, the government has focused on the affordable housing segment by introducing numerous policies, programs, and initiatives for both the developers and the buyers, which include:
# Allowance of ECB to give developers access to capital at lower interest costs
# Credit Linked Subsidy Scheme (CLSS) for first time home buyers
# 100% tax holiday to developers building affordable housing projects
The reforms and several initiatives by the government have given a major boost to developers to foray into the affordable housing segment. Many developers who have traditionally been in the MIG to HIG category are now finding the affordable housing as an attractive segment. Also, there has been strong support from the government and sale velocities in higher ticket size segment has dropped. Therefore, a lot of projects have been re-designed, re-configured, and re-launched to cater to the affordable housing segment.
It is interesting to observe the way in which affordable housing has been defined in the various government notifications for the purpose of availing some of the benefits mentioned earlier. The most important criteria for the project to be classified as an affordable housing is linked to its unit size and not the value of the unit. In simple terms, one can design a project with 1 BHK units having 60 sqm carpet in South Mumbai, where capital values are Rs 40,000 per sq ft and above, but still qualify for the above- mentioned benefits, with each unit costing upward of Rs 2.50 crore. Such projects do not meaningfully add to the affordable housing supply in the market.
As far as the affordable housing projects are concerned, the single biggest challenge for developers is to remain cost-efficient and be able to deliver units in Rs 10-15 lakh range to the end-users. Finding suitable land parcels, which are in the catchment of public transport and other vital social infrastructure at a reasonable price, is the first entry barrier for viable affordable housing projects. In search of economical land prices, a number of developers have developed projects in remote locations, typically 25-30 km away from the city. However, lack of accessibility and under-developed public amenities in these areas have kept end-users shying away from these projects.
To conclude, there is a strong belief that affordable housing sector has tremendous potential. However, it needs a coherent policy framework to expedite approvals and clearances coupled with participation from organized developers who can deliver a well-designed cost-efficient project. Additionally, it is imperative that both the government and developer fraternity should come together to drive innovation to cater to the economic need of the people.
(By Rohit Agarwal, Associate Director, Capital Markets and Investment Services at Colliers International India)