Can affordable housing become the largest segment in residential real estate?

With affordable housing now attracting greater interest from a number of development firms, the supply of such units in the market is expected to increase. We examine the reasons for this trend and whether it can be sustained

Over the past one or two years, the major cities across the country have seen a significant rise in affordable housing projects. According to a white paper by KPMG, titled ‘Indian real estate: Unfolding the new era of growth’, the affordable housing segment is likely to grow by over 30 per cent, over the medium-term. Owing to low interest rates, various sops from the government and demand from consumers, development firms are now looking into this segment, which was once considered to be a low-profit segment by many in the industry.

Pradeep Aggarwal, chairman and co-founder – Signature Global Group and chairman – Affordable Housing Council of ASSOCHAM, explains how “There has been a significant rise in the number of affordable housing launches, in comparison to the last couple of years and there is a profit margin in these projects.”

 

Factors driving the growth of the affordable housing segment

Factor 1 Factor 2 Factor 3 Factor 4
Rising interest from development firms, backed by fund houses Interest subsidy on housing loan – The Credit Linked Subsidy Scheme (CLSS) of the PMAY in December 2016, incorporated two new segments – loans up to Rs 9 lakhs and Rs 12 lakhs, with subvention of 4% and 3%, respectively. Higher allocation of funds for affordable housing – The allocation under the Pradhan Mantri Awas Yojana (PMAY) for FY2018 was increased by 39 per cent to Rs 290 billion (ICRA Feb 2017 Insights) Infrastructure status accorded to affordable housing
This has led to higher launches this year. This has led to more number of buyers from this segment entering the market. More housing supply to come up across states. Likely to improve the access to funding avenues for the segment.

Research by Content Consultants

See also: Government extends affordable housing subsidy to units built on private land

 

Demand and supply

“Developers have realised that the demand for affordable housing is high. So, they have started paying much-needed attention to this segment,” says Aggarwal, whose company has announced over 9,000 affordable units in Gurugram and plans to bring 20,000 more in future. The government’s agenda of ‘Housing for All by 2022’, has also encouraged a large number of developers to eye the affordable segment, which has huge growth potential, adds RK Arora, chairman, Supertech Limited. “Demand for home loans in the affordable segment, has also seen an uptick. There has been an increase in the number of queries, which will in turn lead to sales, in times to come,” he maintains.

 

Government sops for affordable housing

Neeraj Bansal, partner and head, ASEAN Corridor and Building, Construction and Real Estate, KPMG in India, believes that “The infrastructure status to affordable housing, has prompted developers to enter into this segment. This has also provided access to cheaper funding by way of debt, which would reduce the overall cost of homes.”

Arora also credits the government’s subsidy scheme for boosting the segment. “Under the CLSS, beneficiaries are extended interest subsidy of 4 per cent (for MIG with an annual income of Rs 6-12 lakhs) and 3 per cent (for MIG with an annual income of Rs 12-18 lakhs). Moreover, some builders are tweaking their unit’s ticket size, to make it affordable and to avail of tax benefits,” he points out.

If the government lowers the rate of GST (Goods and Services Tax) on affordable housing, from 12 to 8 per cent, as has been suggested in some quarters, this could benefit the development firms and eventually, reduce the rates of housing.

Credit rating agency, ICRA, in its report, said that it expects the growth rates in the affordable housing segment to be in the region of 30 per cent, adding that it would be one of the key drivers for the Indian mortgage finance market.

 

Key challenges faced by the affordable housing segment

SK Sayal, managing director and CEO, Bharti Realty Ltd, explains that “While a number of state governments have made schemes, under which development firms are bringing in projects, the availability of land in the city areas, remains the biggest challenge.” While state governments having realised the potential of freeing up land, this land is available only in the peripheral areas, he points out. “This defeats the purpose of affordable housing, as the people living in these projects will have to spend time and money to travel to their work places,” he adds. The growth of affordable housing and the sector, for this reason, could well depend on the availability of affordable land at the right locations.

 

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