Affordable housing: a myth or reality?

The year 2011 proved to be a relatively difficult year for Indian real estate market with both developers and potential buyers reeling under adverse macro-economic conditions. Industry suffered at the hands of stubborn inflation, falling demand and precariously rising interest rates. However, the silver lining was the increased Private Equity (PE) activity in Indian real estate during the year even as banks looked to limit their exposure to the sector. The cash crunch in the sector saw PE players make a beeline for realty companies, and investments by PE funds grew by a huge 69% during the year, according to research firm Venture Intelligence. In a manner, Indian real estate was rescued from a complete washout year thanks to hefty arrivals of PE players in a depressed market.

But as the Indian real estate industry entered 2012, it had already seen PE exits worth $3.2 billion (cumulative figure for three years ending December 31, 2011) and was expecting PE exits of about $1 billion during the year. Thus, the slowdown of PE activity in the sector, which was already reeling under high debts, had left real estate developers with even lesser reasons to smile. Now, the question was: How will the sector retain its momentum, however slow, in 2012 and beyond? For industry experts and realty pundits the solution to this problem lied in the “affordable housing” segment, which they said, would define the real growth paradigm for Indian realty going forward.

After all, whatever the definition of affordable housing, no one disputes that there is a huge shortage in this segment. According to Ministry of Housing and Urban Poverty Alleviation (MHUPA), the shortage of urban housing in India at the end of the 10th Five-Year Plan was around 27.1 million dwellings to serve 66.3 million households. 88 per cent of this shortage was estimated to be in the economically weaker section - households with monthly per capita expenditure of up to Rs 3,300. The income group with monthly per capita expenditure of Rs 3,301 to Rs 7,300 accounted for 11% of the shortage. Even during the 11th Five-Year Plan, MHUPA estimated that the total housing requirement in Indian cities, including backlog, by end-2012 will be to the tune of 26.53 million dwelling units to serve 75.01 million households. If the current increase in backlog of housing is maintained, a minimum of 30 million additional houses will be required by 2020. If this is the size of demand at this price point, what’s holding back affordable housing in India?

30 million units is surely a big number and as such every real estate developer wanted a piece of it. Come today and the sheen seems to be wearing off. A case in point is DLF, the country’s biggest real estate developer. In 2009, DLF announced that it would build 100,000 flats in the under Rs 20 lakh per unit category across major cities. However, in a recent interview with a business daily, Rajeev Talwar, Executive Director, DLF, said, “In 2009, there was a downturn in global economy… but now prices have gone up and it does not make business sense to launch such projects. Such projects can be done in tier-III and tier-IV towns, but they are not viable anymore.”

The sector’s prospects are looking bleak now 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 per cent to accommodate the interest of the PE investor. Result: End-consumers suffer from unaffordable prices!

The increase in cost of construction also impacts this segment the most. According to industry estimates, construction costs account for more than 50 per cent of the total price of affordable units, while in the case of luxury projects it is only around 20 per cent. 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.

However, the good part is that the government is now planning to rein in the frivolous stakeholders. Take, for example, the Real Estate Regulation Bill. Expected to be tabled in the ongoing winter session of Parliament, the Bill is likely to play a huge role in helping revive demand in the sector. Geared towards enforcing more transparency and accountability in land and home-buying transactions, it will go a long way in breaking down barriers between buyers and sellers. In fact, the Bill envisages setting up of a Real Estate Regulatory Authority, which will encourage construction of environmentally sustainable affordable housing. and promote standardisation.

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. To make affordable housing a reality in India, it would require “will” from all the stakeholders by slightly adjusting their interests towards a wider social cause. Else, it will remain a distant dream!