Status of Affordable Housing in India

At a rough estimate, India's overall housing shortage as of today stands at about 22 million homes.

Tags: Affordable housing, Budget homes, IRR, FDI

BY Sachin Agarwal | Jul 04, 2014 | comments ( 0 ) |

Status of Affordable Housing in India

At a rough estimate, India's overall housing shortage as of today stands at about 22 million homes. Within this, the shortage of affordable housing - homes with price tags in the range of Rs. 10-20 lakh - accounts for a very sizable share. The supply of homes which people with less-than-spectacular financial resources, but who still yearn to live in their own homes is still severely constrained.

Funding For Affordable Housing

The affordable housing sector is clearly in need of supply amplification, which would only happen if more institutional funding is to start pouring into this segment. Until recently, most housing developments are focused on the high to mid-income segment population resulting in a significant gap between the demand and supply of affordable homes. However, the prolonged economic slowdown in the country caused this focus to gradually shift to where the real demand exists - namely budget homes.

Today, affordable housing projects near larger cities such as Mumbai, Pune, Bangalore, Delhi etc. have benefited from institutional funding and have received great response from the buyers. It is very encouraging for the affordable housing sector that many micro-finance companies have now come forward to help buyers from the economically weaker sections (EWS) to buy homes in buying such homes.

Institutional funds can usually expect an internal rate of return (IRR) of approximately 25% by investing in residential projects. The IRR is even higher for well-located affordable housing projects because of the larger volumes and faster absorption. Additionally, they enjoy a higher degree of certainty in terms of the viability and success of such projects if they are dealing with Developers of good market rapport who have land holdings in the right locations.

Challenges

The primary challenge that institutional funds have been facing with India's affordable housing sector is that many of the projects in this category are undertaken by small regional Developers with whom it is difficult to partner in an amicable venture. Other areas of concern to institutional funds as well as investors are:

  • Lack of speed when it comes to obtaining project approvals
  • Many of the locations for these projects are deficient in support infrastructure
  • Absence of sufficient tax incentives for Developers of affordable housing
  • Unfriendly state of FDI processes in India

All these factors have played a role in discouraging more funding into affordable housing sector of India. Considering that the profit margins in this segment are inherently thin and become attractive only when a sizeable number of units in such projects are developed and sold, the cumulative challenges are not insignificant. Investing in affordable housing is a play on volumes, which means that it calls for large supply.

Not surprisingly, many of the investors have been finding it more lucrative to invest in projects with a mix of affordable and mid-segment homes in order to capitalise on both the volume and value-based business potential. Most Developers of affordable housing continue to fund their projects from their own financial resources, bank funding as well as sale-generated revenue. Thanks to the immense demand for affordable housing in Indian cities, project capitalisation by this combination of means has been sustainable. However, it does not support the production of budget homes the kind of numbers required by the market.   

With the new government committing to boost affordable housing in India, the outlook for this segment has changed. This market is now on the verge of a major transformation. More government incentives and boosting mechanisms for affordable housing are imminent and these promise to make institutional funding of projects aimed purely at the budget homes segment increasingly attractive.

In 2013, around 30% of the total residential launches of 1.7 lakh units in India was in the budget homes segment. In 2014, we are likely to see a massive increment in these numbers. The BJP has expressed its determination to make affordable housing one of its areas of prime focus, and we are more than likely to see evidence of this determination in its fiscal plans.

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