How affordable housing can propel the growth of real estate

Published: November 5, 2019 11:24:31 AM

The Indian real estate market is undergoing a transformation of sorts post RERA. In the next half-a-decade, it will see a small scale turnaround driven largely by the affordable housing sector.

affordable housing, real estate, real estate in India, real estate investment, RERA, PMAY, Affordable housing projects can also appeal to investors as projects under this segment invariably cost at least 25-30% less than other projects in the same vicinity but outside its ambit.

The Indian real estate market has always been chaotic, affected by the absence of a regulator and a constant mismatch in demand and supply. However, one segment that has frequently acted as its saviour when the chips are down, has been affordable housing. The fundamental reason behind this is that it is not just real estate, but a need for the masses. The Indian real estate market is undergoing a transformation of sorts post RERA. In the next half-a-decade, it will see a small scale turnaround driven largely by the affordable housing sector. Almost 95% of the country’s population consists of the striving middle class, and the demand in this sector is still huge while supply is limited and there are only a handful dedicated developers.

Developers in the premier and luxury housing segment have been used to high profit margins, whereas the margin in the affordable segment is 10%-15% only. Therefore, just like rapid digitization changed the focus from per unit margin to transacting in volumes, real estate also needs to move towards the volume first model by catering to the demand in affordable housing. One also needs to understand that a majority of buyers in this segment are end-users, therefore the chances of pricing fluctuations is much less as properties are not being bought for speculative purposes. On the other hand, affordable housing projects can also appeal to investors as projects under this segment invariably cost at least 25-30% less than other projects in the same vicinity but outside its ambit.

Additionally, the direct involvement of government and defined project specifications make affordable housing projects more attractive and secure for home buyers. Strict completion deadlines, lack of opportunities for manipulation and easy possession transfer under RERA have built the confidence of buyers in this segment. Smaller ticket sizes also make it more marketable, and the government’s frequent interest rate drops and the enthusiasm of both public and private sector banks to extend easier home loan facilities boosts its prospects.

We have advised a few projects in the affordable housing space in Bangalore and Pune to the tune of 30mn sft since 2017 and have seen encouraging sales numbers in the segment. This number challenges the current gloom of low sales in the industry.

Union Budget and affordable housing

The Union Budget 2019 included provisions that substantially push the demand for affordable housing. The FM raised the tax deduction limit to Rs 3.5 lakh from Rs 2 lakh on interest paid on home loans for the purchase of first home worth up to Rs 45 lakh. The minister further announced that under PMAY-G, 19.5 million homes, equipped with amenities such as electricity, LPG connections and toilets, will be provided to eligible beneficiaries till 2021-22. These steps have significantly boosted demand, turning many fence-sitters awaiting sops into potential home buyers. However, a lot remains still to be done, as the government has already failed to keep pace with supply hovering at 15.3 million houses from 2014-2018 under PMAY, way behind the target of 2 crores set by the government. The cap of Rs 45 lakh also severely hinders the possibility of resurgence promised by this segment, especially in metro cities and this cap may be increased in the times to come.

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The affordable housing segment has been registering growth much before the announcement of Budget 2019. As per industry reports, the segment witnessed a growth of 22% in sales during 2018. Sales increased by 16% in 2018 in the top 7 cities of Bengaluru, Mumbai, NCR, Pune, Hyderabad, Chennai, and Kolkata, as compared to the previous year, though the prices of properties largely remained the same. The budget has only boosted this trend further.

The road ahead

A major realignment in the right direction can be seen with the increasing consolidation within the sector from national and regional developers. With players in the market giving specialisation more importance, they are realising that it is a key factor, especially in the affordable segment. This is where local developers and landowners with the experience and expertise of a particular place are partnering with larger developers to unlock their land values under PMAY.

Government subsidies such as lower GST rates and higher tax rebates are leading to a rise in disposable incomes and, as a result, a greater demand for affordable houses. With this, it is expected that more launches will take place under PMAY within the next 6 months and developers need to step up and utilise the newly introduced benefits to overcome the shortage of 19 million houses in urban India.

The Housing for All by 2022 scheme will also facilitate the development of suburban areas, with the government putting a major focus on enhancing infrastructure and unlocking land held by the government and public sector enterprises.

In the long run, it would be interesting to see if the centre decides to increase houses under PMAY to 60 sq. m., unlocks land parcels owned by it and increases the limit from 45 lakhs. With this, it may be able to steer millennial and young professionals back to the trend of home ownership, which is otherwise on its way to becoming obsolete in today’s shared economy. Several incentives and regulations have already started changing the dynamics of the real estate sector, and the adaptability of real estate players adapt to these changes will determine the sector’s eventual success.

(By Sudhanshu Kejriwal, Managing Partner, EverVantage)

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