While the concept of affordable housing is expected to be the real rescuer of Indian real estate sector in 2013 and beyond, its execution still remains a big challenge due to unclear policy framework. Is there a way out?
Even the numbers indicate that “affordable housing” was nothing but a fad. According to a recent research by Lloyds TSB International Global Housing Market Review, “Housing prices in India have witnessed the biggest increase in the world over the last 10 years by a staggering 284%. However, the BSE Realty index has fallen 19% in the last one year and over 55% in the last five years.” As per Mumbai based real estate research firm Liasas Foras, “between Q4 FY2011 and Q4 FY2012, property prices in the National Capital Region (NCR) increased by 33% and in the Mumbai Metropolitan Region (MMR) by 17%. Bangalore and Pune too saw a modest increase of about 8% and 5% respectively during the period. However, interestingly the demand in India’s top six real estate markets - Mumbai, Delhi, Kolkata, Chennai, Pune and Bangalore – has fallen around 40% on an average. This is certainly a situation of low volumes and high prices.
The sector’s prospects too are looking bleak due to a series of interest rate increases since March 2010 affecting demand for real estate, along with rising input costs and mounting debt. Builders blame the rise in construction costs along with tight liquidity for their debt build-up. But the truth is the rising debt levels are more the result of an investor-driven demand. After all, a builder’s cost in constructing a property is not significant. Purchase of the land is actually done with PE investors’ money who are looking for at least 20-30% returns. Since the builder does not want to share his returns with investors, they jack up the prices of property instead. As per a report titled “Capital-driven real estate and its consequences” by Liasas Foras, property prices are raised by as much as 43% to accommodate the interest of the PE investor. Result: End-consumers suffer from unaffordable prices!
Then, there are other issues, too. Take land itself, for instance. It is not easily available and the records are not properly maintained. This makes acquiring land a time consuming, cumbersome and expensive process. “Land should also come with physical infrastructure, such as access to public transport, sewage treatment lines, and water and power supplies. Without these, no project would be saleable,” says Brotin Banerjee, MD & CEO of Tata Housing.
The increase in cost of construction also impacts this segment the most. According to industry estimates, construction costs account for more than 50% of the total price of affordable units, while in the case of luxury projects it is only around 20%. At the customer end, obtaining financing is a key constraint. One main reason for this is that this customer segment is employed largely in the unorganised sector and typically lacks documents that show proof of address, salary and other information that is mandatory for availing loans from the frontline banks.
Considering all this, it’s really tough for a real estate player to provide affordable housing unless and until the government pitches in. Agrees Navin Raheja, Chairman & MD, Raheja Developers Ltd., as he tells B&E, “For affordable housing to soon become reality the government needs to come up with a PPP model, and implement it in letter and spirit.” No doubt, the public-private partnership is a good model to cater to the housing needs at the bottom of the pyramid but not the way it is happening at present. For instance, currently, any builder can approach the government for subsidies in the name of constructing homes for the poor, and while there are stipulations, these are only on paper. The private sector has to be engaged in a manner that results in proper targeting of the housing stock. “You can’t have subsidies and then sell in a non-transparent manner,” say critics.
Even the numbers indicate that “affordable housing” was nothing but a fad. According to a recent research by Lloyds TSB International Global Housing Market Review, “Housing prices in India have witnessed the biggest increase in the world over the last 10 years by a staggering 284%. However, the BSE Realty index has fallen 19% in the last one year and over 55% in the last five years.” As per Mumbai based real estate research firm Liasas Foras, “between Q4 FY2011 and Q4 FY2012, property prices in the National Capital Region (NCR) increased by 33% and in the Mumbai Metropolitan Region (MMR) by 17%. Bangalore and Pune too saw a modest increase of about 8% and 5% respectively during the period. However, interestingly the demand in India’s top six real estate markets - Mumbai, Delhi, Kolkata, Chennai, Pune and Bangalore – has fallen around 40% on an average. This is certainly a situation of low volumes and high prices.
The sector’s prospects too are looking bleak due to a series of interest rate increases since March 2010 affecting demand for real estate, along with rising input costs and mounting debt. Builders blame the rise in construction costs along with tight liquidity for their debt build-up. But the truth is the rising debt levels are more the result of an investor-driven demand. After all, a builder’s cost in constructing a property is not significant. Purchase of the land is actually done with PE investors’ money who are looking for at least 20-30% returns. Since the builder does not want to share his returns with investors, they jack up the prices of property instead. As per a report titled “Capital-driven real estate and its consequences” by Liasas Foras, property prices are raised by as much as 43% to accommodate the interest of the PE investor. Result: End-consumers suffer from unaffordable prices!
Then, there are other issues, too. Take land itself, for instance. It is not easily available and the records are not properly maintained. This makes acquiring land a time consuming, cumbersome and expensive process. “Land should also come with physical infrastructure, such as access to public transport, sewage treatment lines, and water and power supplies. Without these, no project would be saleable,” says Brotin Banerjee, MD & CEO of Tata Housing.
The increase in cost of construction also impacts this segment the most. According to industry estimates, construction costs account for more than 50% of the total price of affordable units, while in the case of luxury projects it is only around 20%. At the customer end, obtaining financing is a key constraint. One main reason for this is that this customer segment is employed largely in the unorganised sector and typically lacks documents that show proof of address, salary and other information that is mandatory for availing loans from the frontline banks.
Considering all this, it’s really tough for a real estate player to provide affordable housing unless and until the government pitches in. Agrees Navin Raheja, Chairman & MD, Raheja Developers Ltd., as he tells B&E, “For affordable housing to soon become reality the government needs to come up with a PPP model, and implement it in letter and spirit.” No doubt, the public-private partnership is a good model to cater to the housing needs at the bottom of the pyramid but not the way it is happening at present. For instance, currently, any builder can approach the government for subsidies in the name of constructing homes for the poor, and while there are stipulations, these are only on paper. The private sector has to be engaged in a manner that results in proper targeting of the housing stock. “You can’t have subsidies and then sell in a non-transparent manner,” say critics.
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