Indian Reality Sector – Eying on Affordable Housing

With the increasing demand for affordable and low-cost housing and the huge potential of the segment, real estate companies are eying innovative and affordable housing projects, especially in times of economic slowdown.

The Rs 65,000 cr real estate sector has started showing signs of recovery, with the newfound mantra of affordable housing, or you could call it the Nano effect. The industry is currently estimated to be around 5% of GDP and to have a growth rate of 25-30% annually. A recent Assocham Business Barometer (ABB) survey has found that the embattled realty majors see positive signs of recovery taking place within the next quarter against increasing low cost housing demand and improved cash flows. According to a study by PropEquity Research, 74% of residential apartment sales in Mumbai in the first quarter of 2009 came from the low cost segment. The trend was the same in Gurgaon and Chennai too, where the corresponding numbers were 60% and 58% respectively.

Encouraging policies and robust demand for the segment are likely to hold the key for a speedy recovery of the sector. After a lull in 2008, the sector is witnessing real actions, which include the high-profile launches of some major projects, coupled with an overwhelming response for their upcoming projects.

Despite the global financial crisis, the Indian economy recorded a healthy growth during the last three years, with the presence of real domestic demand and consumption continuing to fuel the economy, besides the renewed faith of overseas investors weighing up the series of steps taken by developers to improve their financial position.

Estimates indicate that India has a shortfall of more than 25 million houses, of which 97% is in the low-income group. Moreover, the increasing urbanization projections of 600 million urban residents by 2030, from the current 328 million, present a lucrative market for low-cost housing. This is the reason why top players like DLF, Unitech, Jaypee, Omaxe and Tata Housing have all joined the affordable housing bandwagon. After realizing the resident market dynamics, these players are changing their strategies accordingly. Earlier, they used to tap only 5% of the market, which got saturated during the slowdown. Building and selling affordable housing is the only way for realtors to survive. Most of the realtors have realized the truth that less profit is better than no profit and are eying the potential in affordable housing and devising ways to revive their fortunes.

Affordable housing boom

After the overwhelming response for Nano car, the Tata group has entered the low-cost housing segment to target industrial workers and other low-wage income pool. Tata Housing has already announced the low-cost township to be built at Boisar, 100 km from Mumbai, in the next two years. The price range for houses is Rs 4,00,000 to 6,70,000. Industry pundits say that the entry of Tata group will bring a paradigm shift in the entire landscape of the Indian real estate sector and give many established players a run for their money.

Likewise, a general softening of interest rates has also helped real estate players cut their borrowing costs by as much as 300 basis points. Beyond these things, currently, affordable housing is gaining momentum and seems to have taken the industry by storm. Brotin Banerjee, Managing Director, Tata Housing, echoes the hope: “The demand for new homes has picked up in the second quarter of 2009 from the previous one. Increasing interest in affordable and low-cost housing is widely expected to help India’s real estate market make a recovery in 2009 to 2010.”

There are increasing signs that buyers are returning to the market slowly, but surely. For instance, DLF’s first residential project in Delhi recorded bookings of 1,400 flats on the first day itself. Drop in interest rates by both banks and housing companies is also boosting housing sales. If realtors price their products in the right manner, they would find buyers without doubt. Neeraj Bansal, Associate Director – advisory services, KPMG, says “Affordable housing will play a significant role in the real estate recovery over the next few months as developers are now connecting with ‘real buyers’ for the ‘real prices’ and are pricing projects more competitively.”

Window of opportunity

Low-cost housing has been largely overlooked during the housing boom. Until now, established builders were concentrating on premium segments like new high rises, golf courses, luxury flats, etc. because low-cost apartments will not be luxurious and will be absolutely tiny.

The Tata apartments will be built on 67 acres in Boisar, an industrial area, where most lower-wage commuters stay on rent. A typical carpeted area of the smallest units will be 218 sq ft and the largest units would be about 373 sq ft. Unlike conventional developers, the low-cost housing project business model treats land as an investor and not a capital base. Brotin Banerjee suggests, “To develop low-cost housing projects one needs to find out ways to bring the cost of construction down. We have adopted the revenue-sharing model with the land owners so that we do not have to bid for land at exorbitant prices.” Estimates indicate that if developers are able to roll out their project within 12-18 months, the returns would be in the region of 30-40%, almost similar to what the IT industry enjoyed in its boom period.

Challenges

Until now, one of the biggest challenges for affordable housing was finance. Most banks were unwilling to lend loans to people with no credit history or proof of identity. However, National Housing Bank and National Bank for Agriculture and Rural Development came forward to provide funds to housing finance companies to offer mortgages for such buyers. To reduce risks, banks are demanding from buyers a quarter of the purchases price, with confirmed income proof. Moreover, they are charging little more interest than those with an established credit history. 

Beyond finance, the other biggest risk is execution because developers have to deal with the state governments. There are chances that inefficient and corrupt officials can hurt developers. Given that affordable houses are already low-margin projects, this is the reason why bigger developers are unwilling to construct apartments for middle-income groups, even when the downturn forced them to do a rethink.

Though many now claim to be doing ‘affordable’ housing, the prices do not suggest that, because even though they are building smaller houses, they are selling them only at slightly lower rates than the peak rates. DLF have challenged the practicality of Tata’s low cost housing, starting from Rs 4 lakh. It suggested, “Such types of flats can be made only on zero-cost land acquisitions. We will have to see how the Tata group can provide flats at such cheap rates on freshly acquired land.”

Issues to address

To boost the activity of affordable housing projects, developers must be provided with fiscal incentives. The absence of any direct incentive could act as a dampener for the industry. However, the Finance Minister has announced welcome initiatives like increased outlay on schemes such as JNNURM/Rajiv Awas Yojana, allocation of Rs 2,000 cr for Rural Housing Fund, launch of program of housing to create one lakh dwelling units for Central Para-Military Forces. With these measures, the government is on the right track, but still there are a number of issues that need to be cleared up. These include: clear land titles, mortgage insurance, lack of data on credit history and timely credit, which is more important than subsidized credit. Vikas Rikhye, Property Consultant and Expert, suggests, “The government should consider the industry to be a part of infrastructure development and provide the real estate developers with incentives to increase the investments in real estate to achieve the social commitment of affordable homes.”

Another subprime?

Experts say that affordable housing segment in India is not subprime like the US. There are fundamental differences, both in the economic situation and the customer segments. In US, the housing market growth was linked with easy and plenty of cheap money available. Most banks were tempted and offered home loans to people with poor and tarnished credit histories. The end result was that most customers failed to repay and started defaulting on the loans, which led to foreclosures and home sales.

On the other hand, the scenario in India was completely different. The industry had a boom which has been limited to the middle and upper income segments. The segment earning between Rs 7,000 and 15,000 has hardly considered either lenders or developers, despite the fact that the segment has steady income flows and employer recommendations.

Analysts opine, “Given that in these small-sized homes, the land cost represents a small percentage of the overall cost; the speculative risk is low, with a very low probability of a drop in these property prices.” In India, affordable housing acts as a driver for economic growth and is in no way a subprime like the US. A strong growth in this segment generates a huge multiplier benefit, which includes employment generation for low-skilled daily wage workers and a huge demand for related industries output, including cementand steel. Needless to say, it will bring smiles to the lives of millions of poor people both in urban and rural India.

‘Affordable’ future

Skeptics are of the view that the increasing realtor interest in affordable housing could be a stock market gamble. Just like investors, the developers who joined the affordable housing bandwagon will turn back to luxury projects once the slowdown is over. Regardless of this, the industry is on the road to recovery and is betting in a big way on affordable housing. As long as the developers devise their strategies based on the right demand for the right product, the sector will continue to see growth, with rising demands for affordable housing. But they have to be cautious with regard to their approach henceforth. Let us hope that the government achieves its dream target of building an affordable house for every Indian in the near future.

Tags: Housing Sector, Subprime Crisis, Low Cost Housing,

N Janardhan Rao, Senior Economist.