Affordable housing is the key to India's realty industry being able to change lanes to the fast track but cost escalations due to delayed permissions, lack of access to cheap credit and shortage of building material are proving to be major hurdles. The solution: Policy changes covering land to lending.
The demand for affordable homes alone, in the range of Rs.1-5 million, is in the range of five million. Over a third of new homes is in this category. According to industry statistics, out of 500,000 homes to be delivered this year, a large part will be the affordable housing segment.
But the affordability of home-buyers has been severely hit by cost escalations and high project cost is proving to be the main deterrent. The lack of sustained funds flow to the realty industry not only restricts supplies, leading to housing shortage (mostly in the affordable category), but also results in a spurt in property prices.
Amid this liquidity crisis, a large number of realty companies today find themselves in a debt trap. So much so that promoters of a few companies have pledged a major part of their holdings to seek debt. There is a need to ease bank funding and make foreign direct investment and external commercial borrowings more accessible to developers.
On the private equity front, statistics show that such investments in the residential segment registered a 50 percent decline compared to the office realty space, as these investors were more interested in income-generating assets. In this context, speeding up the launch of real estate investment trusts, or listed companies that own and manage property on behalf of shareholders, on the bourses will help meet the large-scale fund requirement for mass housing.
It is, indeed, heartening that the National Housing Bank (NHB) is setting up an urban housing fund with Rs.2,000 crore ($360 million) to spur affordable housing. The Housing and Urban Development Corp, with a target to build 500,000 affordable homes, has in its first tranche raised about Rs.2,200 crore ($400 million). Both these funds will work as a "pool fund" to incetivise cash-strapped developers aspiring to tap the high potential segment of affordable housing.
It is on the policy front that there is the lack of effective initiatives. This year's budget sop of Rs.100,000 ($1,800) additional tax benefit on home loans will largely benefit tier II and tier III cities. But given that the top six-seven cities constitute less than a fourth of the overall affordable-housing supply, there is a need to launch incentivised policies for developers to provide mass housing in the suburbs and satellite towns of metros and Tier I cities. For developers, the tax exemption for low-income houses up to 60 square metre carpet area and extension of tax holidays for low-income housing under Sec 80 1B of the Income Tax Act could prove beneficial.
With urbanisation expected to grow at a compounded annual growth rate of more than two percent over the next two decades, there is the need to liberalise obsolete development norms, rationalising floor area ratio and density. There should be policy initiatives in place to fast-track the public-private partnership route. For that, the city development agencies should give up policy of land auctioning and instead allow land pooling for developer entities.
Considering a major part of the mortgage disbursed - expected to touch the Rs.220,000-crore ($40-billion) mark by the end of this fiscal - will be in the affordable segment, there is an urgent need to regulate home-loan rates. A parliamentary panel on the finance has sought a cap and regulation on interest charged by housing finance companies. Raising home loan limit for affordable homes in the metros and tier I cities from Rs.2.5 million to Rs.3.5 million may well go a long way in encouraging developers and home buyers, thereby pushing up supply and consumption of mass housing.
With a host of new private equity players and developers targeting mass housing, the coming months will witness increased traction on this segment of the realty industry. Increasing viability of affordable housing projects will be the way forward.
(05.04.2013 - is the editor of Realty Plus, a real estate monthly. He can be reached at email@example.com)