Affordable Housing in India

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maple-shelter-sanaswadi-agarwal-sachin

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 were to start pouring into this segment. Until recently, most housing developments – and therefore fund houses – focused on housing for the high to mid-income segment population. This resulted 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 seen encouraging response from the buyer market. It is very encouraging to the affordable housing sector that many micro-finance companies have now come forward to help buyers from the economically weaker sections 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 repute 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 understandably difficult to partner in an amicable venture. Other areas of concern to institutional funds as well as investors are:

The lack of speed when it comes to obtaining project approvals
The fact that many of the locations for these projects are deficient in support infrastructure
The absence of sufficient tax incentives for developers of affordable housing
The unfriendly state of FDI processes in India

All these factors have played a role in discouraging more institutional funding into India’s affordable housing sector. 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 larger fund houses have been finding it more lucrative to invest in projects with a mix of affordable and mid-segment homes in order to capitalize 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 capitalization by this combination of means has been sustainable. However, it does not support the production of budget homes the kind of numbers that are clearly required by the market.

Encouragingly, the arrival of the BJP government has now changed the outlook for this segment by committing to boost affordable housing in India. This market is now potentially 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. If we finally see a turnaround in the affordable housing segment because of this progressive approach, it will certainly not be a day too soon.

About The Author:

Sachin Agarwal Maple Builders

Sachin Agarwal Maple Builders

Sachin Agarwal is CMD of Maple Group (founded in 1997 as Goyal Constructions) whose mission is to provide genuinely affordable housing to the common man without compromising on quality and amenities. Maple Group’s ‘Aapla Ghar’ initiative has seen unprecedented success. The Group now has unique welfare housing projects, other residential projects and commercial projects in 30+ key locations in and around the city of Pune Maharashtra, India.

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