Our soft-spoken and very determined editor of CNBCTV18.com walks up to me and says, "There’s so much buzz around affordable housing. Why don’t you write about it?"
Summoned to do so, I didn’t really have much of a choice and often a push is what one needs the most to unscramble one’s understanding of a business.
So I’ve spent the last few days reading, analysing and speaking to several stakeholders to clear my nagging doubts around all the hype surrounding affordable housing.
My starting point was my belief that there exists a deep disconnect between the government’s vision of affordable housing and the private sector’s definition of the segment.
From that stemmed the question that despite all the government’s actions on the policy front, including the launch of several models of public private participation (PPP) for land collaboration, is it working to get the private sector more involved?
And of course, I was naturally curious about the burst of savvy capital – from the likes of HDFC Capital, IFC and Piramal — flowing into affordable housing.
In the past two years, news of HDFC Capital raising $550 million for its second affordable fund, joining hands with Prestige Group to create a Rs 2,500-crore fund etc. has received much attention.
The answers I’ve found are all interlinked. Let’s begin with the macro picture of the affordable housing story.
One of the sharpest minds in Indian real estate private equity sector told me over a cup of coffee that there are very few sectors in India where supply of goods is far lower than the demand.
Affordable, low-cost housing happens to be one. The opportunity is huge, according to him.
Well, who am I to contest that, especially when several reports buttress his argument.
"Rising incomes and a government push to house the nation’s billion-plus people will require 60 million new homes by 2024 and unleash investments of as much as $1.3 trillion over the next seven years,” says a report from CLSA India.
On closer look though, I find the headlines and the apparent gold rush into affordable housing overhyped.
Let’s start with the mesh we create, while speaking of the government’s push for affordable housing, tossing big numbers like the $1.3 trillion opportunity in the same breath.
As Different as Chalk and Cheese
In a country, where per capita income still hovers around 1 lakh per annum and less than 2% pay taxes, these are not one and the same opportunities. They are very distinct segments.
The “Housing For All” by 2022 mission requires 1.2 crore urban homes and another 1 crore in rural India to be built.
I’ll stick with urban housing for the purpose of my analysis, because I haven’t heard of any industry participant from organised real estate who is looking at rural India as an opportunity.
Now, the government wants these 1.2 crore homes built for the lower income group (LIG) and economically weaker sections (EWS) in sizes of 30 and 60 square meters at prices of Rs 5-10 lakh.
At the lowest end of the prism, these are aimed at providing a roof over the heads of those who often lie outside of the organised sector — hawkers, autorickshaw drivers, contract workers et al.
For the private sector, building homes at those price points is simply not viable despite policy incentives such as infrastructure status to affordable housing, lower GST of 8%, credit linked subsidy scheme (CLSS) and extra floor area ratio (FAR).
Land prices in metros where there is maximum pent-up demand for such units are still completely out of whack.
So, most of such low-cost housing projects today are being built by state government bodies or by beneficiaries (read home buyers) who end up constructing their own small units on small plots of land.
The most obvious next question from me is, why don’t developers take free land from the government and build affordable projects that are part of the twin PPP models that the government is pushing.
Pat comes a very rational answer: What if the government changes and the new elected one decides to retract the land parcel or the policy itself?
The project will come to a grinding halt, and “we’ll be stuck!” The fear of changing rules is widespread in the industry.
Where the math does work for private sector is where land is cheap — tier three and tier four cities and the peripheral areas of tier two cities.
But is there enough demand for affordable housing in these cities?
I know that two national developers have struggled to sell low-cost projects in Alwar and Bahadurgarh.
State governments like Rajasthan are struggling to find takers for a few of their low-cost housing projects in Jaipur.
I was told in confidence by one of the business leaders that basic assumption itself is flawed.
“We believe that a joint family of two married brothers, respective spouses with children and parents living under one roof would jump at the offer of three independent housing units at Rs 10 lakh each. Not at all.”
In such cases, the home economics goes for a toss. Combined home running costs when split become unaffordable for each family.
Where The Action Is
The government’s thrust and policies start working to draw in private developers at price points closer to Rs 15-25 lakh.
A case in point is the Haryana government’s affordable housing thrust.
Up to 19 sectors of Gurgaon and eight of Sohna were earmarked for Haryana Urban Development Authority's (HUDA) affordable housing policy and to boost private participation.
The state government announced an increase in FAR to 2.25 from 1.75 and exemption from service tax, EDC and IDC (external and internal development charges) as key sops.
That enticed several local players such as Signature Global, Suncity, Supertech and one national player, Adani, to offer 1-2 BHKs at Rs 13-25 lakh in the government’s prescribed square footage of 30-60 square meter.
But even in this segment of affordable housing, few national developers are willing to venture.
Some like Tata Housing and Shapoorji Pallonji have braved the risks but burnt their fingers.
Godrej is not biting. A few like Adani and Piramal are testing waters, but the risks are high.
If they don’t sell 60-70% the project in the early stages of construction, margins could slip through their fingers.
It has to be a tightly managed show on all fronts — approvals, construction costs and timelines and sales velocity.
By and large, most big developers I’ve spoken to admit that while the below Rs 25 lakh units might be the biggest opportunity, they simply don’t have the bandwidth to get into the volume game of low-cost housing.
It is the local developers, with sound business practices and experience, who probably have a better chance at getting this sum game of what truly classifies as affordable housing in India right.
And they’re the ones braving the segment.
The real and big opportunity for most developers, private equity funds and housing finance companies is elsewhere.
Industry may loosely term anything under Rs 60 lakh as affordable and in the Mumbai region even under Rs 75 lakh, and smart capital is betting most on the Rs 25-60 lakh/unit market in the information technology growth corridors and peripheries of tier one and two cities, mainly Bengaluru, Pune, Hyderabad, Gurgaon, Noida, Thane and Navi Mumbai.
According to Propequity data, almost 45% of India’s housing demand resides in this bracket. That, in its strictest sense, is mid-income housing — not affordable as the government envisions.
But what’s even more revealing is that despite all the policy push since 2015, new project launches in neither the affordable nor the mid-housing segment have accelerated in the past three years.
They are actually down substantially as per the first quarter data captured by Propequity for these years. Data of the first five months of 2018, collated by Anarock, corroborate that as well.
So where is the optimism coming from? It comes from the number of units sold.Despite RERA (Real Estate (Regulation and Development) Act), GST
(Goods and Service Tax) and demonetisation, offtake of units priced at Rs 25-60 lakh has been more or less steady through the past three years.
In other words, this is India’s most resilient housing segment.
Big capital is perhaps now hoping for demand velocity to return sooner than later, with new launches drying up dramatically and excess inventory getting soaked up.
The recent expansion in carpet area eligible for a government credit linked subsidy scheme (CLSS) for the middle income group to 200 square meters has been done precisely to get a large part of this stuck inventory moving.
In earnest though, my answer to my questions can be summed up in one line: affordable housing is not what India’s savvy capital or the private sector is chasing just yet. It’s the mid-income.
Manisha Natarajan is Group Editor, Real Estate & Urban Development, Network 18 and has been watching real estate closely for 7 years.