Affordable Housing: Govt should look at a combination of supply and demand side subsidies

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September 7, 2020 6:00 AM

The rent will be fixed by the ULBs as per local surveys and the increment in rent per year is also proposed to be capped. In such a scenario, the important aspect will be the cost of retrofitting, development and maintenance to make the project viable.

The government should consider allowing the rent to be reviewed on a periodic basis and allow market-linked upward or downward adjustment.

To meet the objective of Housing for All by 2022, the government has been focusing on various schemes and benefits to facilitate ownership of affordable housing. However, for an emerging economy like India, it is also very critical to focus on affordable rental housing. Spurred by the Covid-19 pandemic and its adverse impact on the living conditions of the migrant workers/poor, the government has recently announced a plan for affordable rental housing.

There is a section of the population that cannot afford to buy a house or may not qualify for a housing loan, even with all the government’s incentives for affordable housing. There is also a segment of the population that may not want to buy a house because of various reasons. They could be migrant workers, or they could be the floating population. Hence, for a developing country witnessing rapid urbanisation, it is very critical to focus on affordable rental housing to ensure decent living conditions for the economically weaker segment.

The government’s recently-announced Affordable Rental Housing scheme proposes two models. Under the first model, the government’s vacant houses under JNNURM/RAY (Jawaharlal Nehru National Urban Renewal Mission/ Rajiv Awas Yojana) can be used for affordable rental housing. There are 1.08 lakh of such housing units with the government. There will be a concessionaire selected by bidding, who will do the retrofitting/development to make it habitable and operate it as an affordable rental housing complex (ARHC) for 25 years, and after that, these complexes will be transferred back to the government.

The rent will be fixed by the ULBs as per local surveys and the increment in rent per year is also proposed to be capped. In such a scenario, the important aspect will be the cost of retrofitting, development and maintenance to make the project viable. Indeed, these properties would require significant investment in maintenance and upkeep. Hence, the government should consider a longer concession period of 40-45 years to improve project viability. Moreover, in this model, the existing concessionaire should be given the ‘Right of First Refusal’, given the investment already made by them in these complexes.

The second model proposes that any public/private entity with vacant land can use the same for ARHC. There are large parcels of vacant land with several public entities like Railways, Defence, port trusts and some other PSEs. The utilisation of this land for ARHC will ensure that these public entities are able to extract some value out of idle assets. Land cost accounts for roughly around 20% of an affordable housing project. As the land is already available with these public entities, the incremental cost for them will mainly be the construction cost. However, the incentives being offered for ARHC may not be sufficient to attract private land given the low rental yield in India. A shorter operations-and-maintenance liability, of 10-12 years (as against the currently proposed 25 years), post which the entity has the option to withdraw from the scheme will improve the viability of this model.

The government should consider allowing the rent to be reviewed on a periodic basis and allow market-linked upward or downward adjustment. The government can also look at tweaking the model so that 70-80% of the rent is fixed as per the scheme, whereas for the rest, the entity is allowed flexibility in deciding the rents.

In order to encourage participation from the private/ public entities, the government intends to give incentives in the form of exemption of income tax on any profit from these projects, exemption of GST, project finance at a lower interest rate and 50% additional FAR (Floor Area Ratio) at no additional cost. These incentives are much required, but are supply-side subsidies and may not suffice for India. The government should look at a combination of supply- and demand-side subsidies. The demand-side subsidy could be in the form of housing allowance given to the target group. While this will put an additional burden on the government’s finances, it will help in making the scheme all-encompassing.

The author is chief economist &  national director (research) Knight Frank (India). Views are personal.

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