Cinema being the reflection of the society, some of 70s blockbusters like Deewaar, Namak Haraam, Namak Halaal, and others dealt with some crucial topics like unemployment, labour unrest and poverty in the post-Independence era. Similarly, Manoj Kumar and Amitabh Bachchan starrer blockbuster ‘Roti, Kapda aur Makan’ spoke about the three basic necessities of life. Almost 72 years after independence, though the first two necessities have been somewhat addressed, the third requirement of shelter is set to become a reality following the government undertaking an ambitious but realistic scheme of ‘Housing for All by 2022’, under the Prime Minister Awas Yojana (PMAY). It intends to bridge the huge demand and supply gap in the housing sector.
The optimism for the affordable housing sector is picking up. And for the first time in many years, the Government has walked the talk on the issue. Industry veterans are also acknowledging the fact that whatever work that has happened in last four years on this front has really galvanised the sector and now it has reached the stage of take off.
What is the current demand-supply situation?
The affordable housing sector picked up pace only after the NDA government came into power. Some of the surveys that were carried out in 2012 talked about the huge deficit of close to 1.8-2 million homes. Of this, 95 per cent were in Economically Weaker Section (EWS) and Low Income Group (LIG) segments. The surveys also pointed out that by 2030 the requirement of houses will grow to 30 million. Even at that time (2012), the policies were in place to tackle the problem, however, the deficit continued to increase. Several community efforts were undertaken to resolve the issue, including mushrooming of ‘informal settlements’ (slums), which means that government policies, development plans of various municipal bodies and several other governmental interventionsdid not bear fruit and the problem remained unresolved.
The more crucial question is, despite having all policies in place why it could not be tackled? The job to provide affordable housing to EWS and LIG segment was given to the housing boards of various states. The performance statistics of these bodies show that not more than five-10 per cent of what was needed could be provided by all the housing boards put together.
On the other hand, the unorganised real estate sector was thriving, where the realtors were mostly catering to the demand of the upper and upper middle class. After the successive property market boom of 2007 (Mumbai Metropolitan) and 2011 (Delhi NCR), the sector began to ignore the market demand and continued to build bigger homes, even though the requirement for smaller (1 BHK) homes kept growing. After Real Estate Regulatory Authority (RERA) was established across the country in 2016, more than 13,000 projects have been registered in Maharashtra with MahaRERA. Out of this, 52 per cent of the housing stock is unsold these were created in the past thinking that they will be going into the “investors” pocket. However, that has not happened and there is a severe mismatch between the stock that is available in the market and the type of stock that is required by the people falling under EWS-LIG category. This resulted in glut and now the sector is flush with unsold inventories of roughly seven lakh homes across the country.
What are the steps that government has taken?
With establishment of RERA, the hitherto unorganised real estate sector began to fall in place and today after almost two years, it has become adequately organised.
Before the RERA era, some investors who had booked under construction property 10 years ago are yet to get the possession. With stricter norms, the situation has changed in the recent past.
To give further fillip to this sector, recently, the government has reduced the Goods and Services Tax (GST) in the real estate sector. It has brought down the tax rate on completed houses to five per cent while fort the houses under construction it has levied tax at the rate of one per cent. In addition to this, it has introduced the interest subvention scheme, Credit Linked Subsidy scheme (CLSS), and has broadened the criteria for people qualifying for the affordable housing scheme. Further, the real estate sector, which generates huge employment and contributes the highest to the GDP, has been given the status of infrastructure. The government and the private sector need to address the housing shortage issue inclusively. This participation will not only cater to the demand for urban housing but also contribute significantly to India’s economic growth.
Sudhir Pai, CEO, Magicbricks, said, “The scheme was aimed at addressing the critical urban issue of housing shortage by providing affordable homes to all through easy access to formal finance, cheaper loans for builders to build in this category and the credit linked subsidy which would lower the EMI burden for affordable housing buyers by about `2,400 for a loan of up to 20 years. The government has done its bit to put more money in the pockets of tax payers.” Further, by giving subsidies to first-time buyers, the scheme made affordable housing a lucrative option for private developers. So, with favourable policies in place, there will be an increase in latent demand for affordable housing.
Ravindra Sudhalkar, ED and CEO, Reliance Home Finance, said, “Setting up of RERA has helped in maintaining the demand in the housing sector. With RERA in place people’s confidence has come back.”
Adding to this, Deo Shankar Tripathi, MD and CEO, Aadhar Housing, said, this Government has done a marvelous job with respect to spreading awareness about the availability of loans for affordable housing. An enabling environment has been created though affordable housing has not yet picked up in a big way. But I am confident that once the big builders who are stuck with unsold inventories in the sector and they see 25 per cent margin in affordable housing, this sector will definitely pick up”.
What more is needed?
The objective should be to create a great ecosystem for the sector. For that and also to boost the supply side, the government must work towards solving five key challenges.
First, government needs to regularly release land parcels for affordable housing projects, identified within municipal limits and bring more peripheral lands into developable limits of the city authorities.
Tripathi said, “The government land is not cheap, particularly in the Metros. In Mumbai, railways charged a huge price for a piece of land owned by it for the slum redevelopment in Dharavi. However, this is a peculiar problem related to big cities like Mumbai, Delhi and Bengaluru but in Tier II and III, land is available in adequate quantity. In areas other than Metros, the government should follow the Madhya Pradesh model, where the state government has given land at a concessional rate to the developers.”
Sudhalkar said, “Ideally for affordable housing to succeed, land should be made available at zero cost. However, having said that the government should also help developers in getting title clear land. Ideally it should follow the Haryana model, where the state government not only gives title clear land but also identifies beneficiary and allots constructed houses to them. The developers have one window clearance and just have to construct the houses and handover them to the government. Allotment and distribution is also taken care of by the government.”
Second, for affordable housing to work, accelerating the building approval processes is critical in order to limit the gestation period and the associated costs. Currently, over 20-30 clearances are needed for each housing project and that too from multiple authorities. This spans over a period of two years and hence increases gestation period and the project cost.
Third, restrictive Floor Space Index (FSI) and density norms have made affordable housing segment unattractive for developers. The government must ease some of these norms as they would be critical for the development of affordable housing.
Nikhil Bhatia, MD and capital markets Head, Western Region, CBRE, said, “Confederation of Real Estate Developers Association of India and Maharashtra Chambers of Housing Industry, have approached the Government with a plea that the definition of affordable housing should be reconsidered and instead of `45 lakh, it should be raised to `75 lakh. Also, Transferable Development Right (TDR) and Premium FSI should be kept out of GST purview.”
Credit: Magicbricks
Fourth, there is an urgent need for alignment of state level affordable housing policies with the central government policies to remove ambiguities around availing central incentives, while ensuring compliance with the state policies. This has created hurdles in availing the benefits of central government schemes.
Fifth, low profit margins have kept larger and serious developers away from this segment. High sensitivities to changes in the input costs, project delays and lack of availability of skilled manpower have also challenged affordable housing projects.
Nonetheless, affordable housing is witnessing an uptick in demand across markets. Around 40 per cent of home buyers said PMAY encouraged them to buy a new home, according to a poll conducted by Magicbricks. New launches across destinations are also happening, mainly in units priced up to `50 lakh. So both demand and supply are witnessing an upswing and that would be key in achieving the target for “Housing for All”.
With affordable housing picking up, will the investors desert the market?
Residential real estate in India is not a homogenous market. Given the fact that every price point will have a different demand, affordable housing will remain independent of other segments in residential real estate.
Pai of Magicbricks opined, high home ownership doesn’t co-relate with a drop in housing demand. As the need for food or clothing doesn’t diminish the demand for these products, affordable housing sector will not be able to tap into the existing demand for quality home ownership. “Several developed countries with high home ownership continue to enjoy robust housing demand. That’s because home buyers will upgrade to better homes, they will buy multiple homes, buy homes in prime localities and homes will be bought for specialised purpose. India will continue to enjoy strong underlying drivers for housing growth supported by urbanisation, job creation, nuclear families and mortgage growth,” Pai said.
Sudhalkar said, “Looking at the current market, one can confidently say, the investor has run away from the market. The rush of investors that we saw in 2006-07 in Western India and in 2011-12 in Northern India, such situation is not prevailing now. What we are witnessing now is demand from genuine users. There is a reason for the investors to stay away from the market. They will come back only when real estate as an asset class will give them a rate of return better than other assets. If you see real estate prices in Mumbai, which is the benchmark for rest of the country, it has remained almost stagnant for almost four to five years. The real estate prices have risen by an average 10 per cent per year. If we assume this as a regular trend then real estate prices have corrected by almost 50 per cent.”
However, one good thing that has happened with the correction in prices and with the increase in the income of the people, the affordability to purchase houses has also increased in Mumbai.
Mumbai has recorded the third highest growth in annual household incomes over a five-year period (2014 – 2018), which is a rise of 20.4 per cent in annual household incomes during the period, Knight Frank said in one of its recent studies. The growth in housing prices in the same period in Mumbai has been estimated at eight per cent only. The report evaluates 32 cities across the world to understand the difference between house prices and income and estimates the gap to be $740 billion in 2018.
Despite being India’s most expensive real estate market, Mumbai emerged among the more affordable cities amongst its global peers. It has seen household income growth outpace house prices growth by 12.4 per cent, indicating an improvement in affordability. The house prices in comparison have grown at a much slower pace of eight per cent while the real disposable household income growth was over 20.4 per cent in the five-year period ending 2018. The affordability in the city has improved on account of reduced size of units with largely stable prices. Consistent reduction in apartment sizes has also lowered the average ticket price for Mumbai. It is estimated that on an average, newly built homes, launched between 2014 and 2018, are smaller by 25 per cent. Maximum launches, especially in the last two years (2017 and 2018), have been in the affordable and mid-range segment with ticket prices not exceeding `75 lakh.
Credit: Magicbricks
Mumbai is one of India’s most expensive housing markets but has seen the affordability of homes significantly increase in the last few years. It is now estimated that a house in Mumbai will cost approximately seven times the annual household income as against 11 times in 2014, the report said.
Shishir Baijal, Chairman and MD, Knight Frank India, said, “Mumbai’s residential housing shortage has been a reason for concern for most urban development agencies including the Government. Similar to other global cities, Mumbai adds many new settlers every year making it a difficult place to find housing. However, in comparison to others, Mumbai is distinctly more affordable. The general growth in the economy coupled with increased incomes and reduction in property prices have ensured a more balanced housing situation. Mumbai has seen a drop of close to seven per cent in the ticket price regards to the new launches in 2018. Further, with the recent announcement of reducing GST on under construction projects, the effective payout by the buyers is expected to reduce by up to seven per cent.”
According to latest released Government figures, out of targeted one crore houses, the Government has already sanctioned 79 lakh houses under PMAY scheme. But the pace of development needs to pick up rapidly to achieve the target as only 16 lakh houses have been developed till date.
Affordable Housing Bandwagon
In 2015, Modi government announced that by 2022 every Indian would have a brick and cement house with gas, water, electricity and a toilet. The scheme at the foundation of this promise is the Pradhan Mantri Awas Yojana (PMAY), which provides subsidies for building low cost houses in both rural and urban areas. Through the scheme, the government aims to subsidise the construction of 2.95 crore rural houses and 1.2 crore urban houses by 2022.
As per the Government of India website, out of 1.2 crore urban houses it aims to build, 79.03 lakh houses have been sanctioned, and just 20 per cent of the sanctioned houses have been built (data as on February 25, 2019). Another 41.42 lakh houses are in various stages of construction. While the government tried to incentivise private players by offering tax incentives and access to low-cost capital, initially they depicted limited interest in the affordable segment due to thin margins, high land cost and delay in project approvals. However, amidst the subdued demand grappling the Indian residential real estate sector and the government’s decision to accord infrastructure status to affordable housing segment, we have seen an increasing private participation in the affordable housing segment. Favourable government policies like GST, demonetisation and establishment of the real estate sector regulator RERA, are expected to make a positive impact in the long run, but will create a short-term pain for the whole real estate industry.
Recently the government has cheered the home buyers from the reduction in the GST rate from eight per cent to one per cent for the affordable housing and from 12 per cent to 5 per cent for other categories. This is a positive sign for home buyers, but is a negative for the real estate developers, as there is no input tax credit available. Since developers are operating at low margins, the GST cut by the government is likely to backfire. There will be rise in the cost of under construction houses, which would be borne by the buyers, provided there is a provision in the agreement for passing on the higher cost. As far as new construction properties are concerned it will be a higher cost, which will again keep buyers away. One of the possible solutions would be the availability of input tax credit or lower rate of GST on key raw materials as far as the outlook of the affordable housing is concerned, it is bright and will have a positive impact on other linked industries like cement and steel.
The fortunes of some major industries like cement, steel and others are closely linked to the performance of the real estate sector as cement and steel consists of more the 50 per cent of the total housing materials. With affordable housing gaining momentum, demand for cement and steel is expected to rise. “We estimate overall cement and steel sector to grow at five to seven per cent in the next three years. According to a report of CLSA, cement and steel demand from housing is expected to increase by eight per cent and 12 per cent, respectively, over Financial Year 2017-24,” said Rajnath Yadav, Senior Fundamental Research Analyst, Choice Broking.
Cement companies with pan-India presence and low cost of production are likely to benefit from affordable housing scheme. Preferred beneficiary companies would be Ultratech Cement, Shree Cement, ACC and Ambuja. In the steel sector, there would be higher demand for unorganised long steel producing entities that is MSME. Majority of the large organised steel players are engaged in the manufacturing of flat steels, which are not much used in real estate industry, added Yadav.
As per Anarock research, the average share of affordable housing supply to total housing supply was around 40 per cent between the Year 2013-2018, indicating the incessant activity in this segment. Affordable supply increased by 18 per cent in 2018 over 2017; this is the first positive sign of market recovery after the regulatory changes. However, several factors like lack of key infrastructure facilities in semi urban and rural areas, scarcity of land parcels in core areas of cities are curbing the development of affordable housing. Moreover, limited private participation due to low profit margins and time-consuming approval process is acting as a barrier to complete government’s target by 2022. Government needs to create a master plan under the affordable housing to fasten its progress via various measures like provision of unused government land parcels for affordable housing projects and incentives to bring more private players into the action.
Affordable Housing Gives HFCs Advantage Over Banks
Investors with long-term horizon can benefit from Canfin Homes and Repco Home Finance
The government has conspicuously driven its affordable housing agenda through its flagship ‘Housing for All by 2022’ scheme launched in June 2015. Focused on economically weaker sections (EWS) with an annual income of less than `3 lakh and low income groups (LIG) with an annual income between `3 and 6 lakh in urban areas, the scheme’s target is to construct more than two crore houses across the nation by 2022.
The Credit Linked Subsidy Scheme (CLSS), one of the scheme’s key components, will ensure upfront credit of the interest subsidy on home loan thereby reducing the EMI amount. While the CLSS time frame has been extended to March 2020, it has been expanded to cover two groups and those are middle income group – I, (MIG I) with an annual income between `6 and 12 lakh and middle income group - II (MIG II) with an annual income between `12 and 18 lakh. The level of interest subsidy (varying from 3-6.5 per cent) and loan eligibility (varying from `6-12 lakh) would be based on borrower’s income categorisation.
In sync with other demand-stimulating measures, the government and regulators have ensured that affordable housing industry growth is not stifled by both inadequate finance and housing supply constraints. To incentivise the banks, housing finance companies (HFC) and non-banking financial companies for providing seamless credit lines to creditworthy borrowers, a host of measures have been taken. First, the government has raised the loan ticket size for priority sector lending (PSL) eligibility to `35 lakh (in locations with 10 lakh+ population). Second, the standard asset provisioning rate has been lowered. Third, the exposure limit of debt mutual funds for investment in AA and above rated HFCs has been raised. Fourth, the risk weight on bank lending to AAA rated HFCs has been substantially raised. Besides, IRDA has exempted investments in AAA rated HFCs from sectoral cap.
To boost the supply of housing units, ‘infrastructure’ status has been accorded to affordable housing. The developers are now free to raise money for such projects through ECBs and masala bonds, and profits from the construction of affordable housing have been made 100 per cent tax exempt. Very recently, GST rates on affordable housing projects have been slashed to one per cent which is likely to propel the demand further. The real estate regulation and development authority rollout is not only ensuring timely project execution but it has also raised the developer’s responsibility and the buyer’s trust in one go.
Rajiv Mehta, Executive Vice President, Yes Securities, said, “HFCs are better placed to relish a larger pie of longer-term affordable housing finance opportunity compared to banks. Factors like phenomenal reach in the outskirts of metros, strong presence in Tier I-III locations, credit appraisal processes aligned to self-employed and informal segments, superior customer servicing, and effective recovery mechanisms have put HFCs in a good position.”
Among the known HFCs in the listed space, we believe Can Fin Homes (CMP `323.40) and Repco Homes (CMP `449.80) are better placed to cash in on the affordable housing opportunity. Their prevailing focus on affordable housing customer segments and ticket sizes, well-capitalised and low-risk balance sheets, and resilient funding profiles keep them in good stead. While transient factors have impacted their growth in their home states, both these players have made smart inroads into other states and maintained profitability levels. As the home market growth picks up momentum, loan growth and Return on Equity should improve further, said Mehta.
Valuations of these stocks seem reasonable too, both in the context of historic multiples as well as high trend of profitability of the franchise. Investors committed to a long-term investment horizon can expect a reasonably strong compounding from the current price, he concluded.
Twist Policy To Create Million Homes
The real estate sector is still somewhat capital starved
Despite being conferred infrastructure status for over two years now, affordable housing sector remains somewhat capital starved as banks, insurance companies and other lenders are yet to focus on this sector. On its part, RBI is yet to issue a circular to banks interpreting infrastructure status as to how banks should treat financing to affordable housing projects different from the rest of their real estate book. India needs over $50 billion of construction finance each year to make `Housing for All’ a reality.
Today, most of the supply of affordable housing comes from small local developers across the country, requiring Rs1-10 crores of project finance. The funding challenge here is synonymous to SME lending and can only be solved if banks set up specialised books dedicated to affordable housing project finance.
Unfortunately, most banks are yet to replicate this approach. While there is a lot of policy push for Banks and HFCs to lend to home buyers, there is little incentive today for lenders to focus on affordable housing project finance.
To begin with, RBI classifies home loans for purchase of property up to Rs 45 lakhs as Priority Sector Lending (PSL). As banks are strongly incentivized to undertake PSL, home buyers benefit from availability of cheaper home loans, thus boosting demand for housing. However, we need to recognize the fact that demand for affordable housing was never the constraint. Our key constraint is supply. Unless we solve the supply constraint, any move that increases demand (like cheaper home loans) will only result in increasing property prices, thus making housing more unaffordable!
Though RBI has a policy under which project finance can qualify as PSL, the broad terms of the policy has left a lot to be desired. Under its policy to qualify as PSL, every single unit from the project needs to be priced at less than Rs10 lakhs and every single buyer has to be of EWS category (annual family income less than Rs3 lakh). We do not know of a single loan in the country that qualifies this criteria! For instance, in a project with 1000 units, if the developer sells one unit to an Army jawan with family incomeRs 30,000 per month, the whole project will fail to qualify as PSL.
We suggest RBI use the same yardstick to qualify project finance and housing finance. Today, home loan to customers buying a home priced at Rs 45 lakh qualifies as PSL. To my mind, bank loans for a project where every single unit is priced at less than Rs 45 lakhs should also be classified PSL.
To conclude, affordable housing clearly has complex challenges. If we ask industry experts on what it takes to catalyze affordable housing supply, we might get a long laundry list including single window clearance for approvals, digitised land records, relaxation in town planning norms, increased land availability and FSI incentives.
In our humble opinion, the lowest hanging fruit is solving the funding challenge. If we can just classify Project Finance for Affordable Housing projects as PSL, Banks might start lending to projects, thus catalyzing supply of a million homes each year.