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The Future of Affordable Housing

The past couple of years have witnessed significant project launches in the afford-able housing segment in India. One of the major reasons is the global economic slowdown pulling back developers from high margin luxury segment to low margin affordable segment due to vol-ume sales and lesser investment. On the demand front, rising disposable incomes and growing urbanization have further fuelled this growth. Micro financing has

helped the developers and consumers avail easy finance without stringent KYC norms of banking entities. Government schemes too have supported the move-ment, especially for the EWS segment through interest subsidies, tax benefits, incentives to developers in the form of higher FSI, subsidized loans among others.

Affordability is a relative term linked to one’s income, expenditure, commitments and savings. Different countries have varying definitions of affordable housing depending on their economic dynamics. In true sense, affordable house is one that provides adequate shelter and is in line with one’s budget.

In India, various Government working groups and independent agencies have defined affordable housing on the basis of house-hold incomes and size of the homes. Affordable houses, as per RNCOS comprise houses for Economically Weak-er Sections (EWS), Lower Income Groups (LIG) and Middle Income Groups (MIG).

The Future of Affordable Housing

Affordable Housing - RNCOS Definition

Category

EWS < INR 1,50,000 Up to 300 Sq Ft Sanitation, adequate water supply and power

EMI does not exceed 30-40%of gross monthlyincome of the buyer

Provision of community spaces and amenities such as parks, schools and hospitals

300 - 600 Sq Ft

600 - 1200 Sq Ft

INR 1,50,000 - 3,00,000

INR 3,00,000 - 10,00,000

LIG

MIG

HH Income (P.A.) Basic Amenities EMI/RentSize (Super

Built Up Area)

Source: RNCOS

As per census 2011, there is huge short-age of houses for the lower most cat-egory i.e. EWS. But the real opportunity lies in the LIG housing where the finan-

cial risk of buyer is not high and proper documentation is easily available.

Urban Affordable Housing Shortage

Category

Total 66.3 24.7

EWS 0-3,300 21.81 21.78

2.89

0.04

27.57

16.92

3,301-7,300

7,301-14,500

14,501 and above

LIG

HIG

MIG

Monthly Per Capita Expenditure (INR)

Housing Shortage (Million)

Estimated No. of HHs (2007)*

Source: Report of the Technical Group (11th Five Year Plan: 2007-12) on Estimation of Urban Housing Shortage*Distribution of 66.3 million households estimated from percentage of MPCE classes in NSS 60th Round (Jan-Jun 2004) NSS Report No. 505

The growth in housing construction is directly linked to the country’s macro economic perfor-mance. For every rupee invested in housing and construction, 78 paisa gets added to the GDP. Housing sector contributed 5% to India’s GDP in 2012 which is further expected to rise to 6% in 2013. The slowing pace of Indian economy along with steep depreciation in rupee against the US dollar has added to the woes.

Projections state that the Indian economy is about to grow at a slow pace of 5-6% in next five years. Real estate is under pressure. HIG and luxury segment is losing focus. Financial constraints pull developers towards affordable segment (low margin, rapid sales)

6.4%

3.3%

5.8%6.1%

6.7%

2011 2012 2013e 2014f 2015f

Real GDP Growth

11.70%

88.14%

EWS

LIG

MIG

HIG

0.15%

0.01%

Source: Central Statistical Organization, EIUNote: e/f = EIU Estimation/Forecast

Breakup of Housing Shortage

The slowing pace of Indian econ-omy along with steep depre-

ciation in rupee against the US dollar has added to the woes.

Source: Report of the Technical Group (11th Five Year Plan: 2007-12) on Estimation of Urban Housing Shortage

Problems at Consumer Front Problems at Legislative Front

Inadequate Savings Lengthy Approvals

Lack of Financial Awareness Unclear Laws and Guidelines

Ever-Rising Cost of Construction

• Majority income of LIG households spent on food, non-food and house rent expenses

• Approvals from nearly 40 departments in central, state and local bodies

• Nearly 2 - 3 years for approvals and even more leading to 25-30% cost escalation

• The building bylaws and rules for FSI, zon-ing and development plans lack clarity

• Overlapping guidelines for real estate development

• Random modifications in regulations ham-per the entire project planning

• Disposable surplus is highly sensitive to change in expenditure

• Low awareness about emergence of Micro Housing Finance Companies/Self Help Groups

• Inadequate information about Government schemes meant for lower income housing

• Insufficient knowledge of financing options and rationale to judge the most viable option

• Construction cost includes cost of cement, steel, sand and labor

• Other costs comprise cost of land, registra-tion, approval, developer’s margin etc.

• Steep price rise in raw materials and labor (AAGR 2005-2012)

Cement - 10% Steel - 20% Sand and brick - over 100%

Amend-ment in Flagship Schemes

Single Window Clearance

Fund Raising through ECB

Government has recently amended flagship scheme Rajiv Awas Yojna. Ministry has allocated INR 322 Billion for RAY during 12th Five Year Plan. Increased provision of INR 75,000 instead of the earlier limit of INR 50,000 per EWS/LIG dwelling unit is meant to boost the low income housing in the country. Similarly, Centre has also improvised the Interest Subsidy Scheme in favor of masses. As per the amended scheme, nearly 1 Million beneficiaries would be covered under ISS dur-ing 12th five year plan. INR 36 Billion is allocated for the implementa-tion of ISS for Housing the Urban Poor (ISHUP), which is rechristened as the Rajiv Rinn Yojana (RRY).

The Reserve Bank of India has relaxed the norms for external com-mercial borrowings or ECBs for Housing finance companies for the purpose of on-lending for low cost housing units. Ease of fund raising through external commercial borrowing route is a major step to propel the affordable housing sector. Builders can borrow cheaper funds from abroad, thereby leading to significant fall in the financing cost. As per the amendments, the total experience of developers going for ECB route has been lowered to 3 years, against 5 years. Unlike earlier, there is no need of minimum paid-up capital for HFCs to avail external borrowings. The aggregate limit for ECB has been extended for the FY 2013-14 and FY 2014-15 with a ceiling of US$ 1 Billion in each of the two years, subject to review thereafter.

Initiatives to Spur Growth

The major hurdle in low cost housing is the excessive duration of approvals and hassles in procuring numerous approval certifica-tions and clearances. Industry stakeholders and major developer associations such as CREDAI have urged for streamlined approval processes to bring down the cost of houses. Of late, some regions have adopted the adored SINGLE WINDOW CLERANCE way which has lead to remarkable cost reduction and convenience. The state of Punjab has successfully followed the model with successful implementation. On the similar lines, Municipal Corporations of Delhi and Indore have introduced online sanction for building plans and issuing completion certificates. More such developments are expected to improve the housing sector performance in future.

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