The first two things which come to mind when someone talks about the country’s economic growth and social wellbeing are – urbanisation and housing. Over the last two decades, India’s urban population has increased from 21.7 crore to 37.7 crore and is expected to reach 60 crore, or 40 percent of the population by 2031. India is already heading towards being the most populous country in the world. A high GDP growth rate has created a large middle class segment. However, the actual number of poor, under paid, part-time employed and jobless has increased as well. At the same time, the growth in housing has also not been able to keep pace with the growing urban population. Despite research reports highlighting the huge amount of unsold inventory in each city and the number of upcoming projects, it is also a fact that India has a housing shortage of close to 1.9 crore units. 96% of this urban shortage is primarily for the economically weaker sections (EWS) and lower-income groups (LIG). It is this segment of ‘unhoused’ which has the potential to become the sector’s next growth driver.
We have ample examples of slums sitting cheek-by-jowl right next to palatial luxury; some of which include the world’s most expensive homes in the city areas. The current pattern of urbanisation is largely taking place on the fringe of cities, much of it is unplanned and outside the purview of city codes and bylaws. Unprecedented growth is leaving municipal bodies with critical infrastructure shortages and service gaps which need to be filled. The government is gearing up on all these fronts. A lot of focus is being put towards setting up infrastructure in the country. “Housing for all by 2020” which aims to construct 20 million homes across the country, interest subsidies for loans up to 12 lakhs, tax exemption on profits on affordable housing projects for 5 years instead of 3 are all positive steps in the right direction.
From a sector perspective, the luxury and premium housing segment has been languishing for the last few years. The impact of demonetisation and the Real Estate Regulatory Act (RERA) has sharpened the focus on home buyers and end-users, especially in the most expensive property markets of the country. Affordable housing has opened up a new source of revenue as well as boosted the confidence and goodwill of real estate developers. Many private players are now undertaking affordable projects. Thus, from a supply perspective, we should see focus from established players, despite the segment having its own set of challenges. However, the numbers need to stack up for a developer to step in and make ground.
There is no doubt that demand for this segment of housing is there with enough factors fanning this demand as well. In the past five years, mortgage rates have dropped close to 200 basis points. Housing prices in most locations have remained stable in the last 2 years while per capita incomes have shown a compound annual growth rate of close to 10%. Housing finance companies (HFCs) have also cashed onto this demand pretty well. They lend to people with an annual income that ranges from INR 2 lakh to 10 lakh. They also offer tailor-made loan schemes and offer a higher loan-to-value (LTV) ratio as well. Some of these HFCs have shown remarkable growth over the last few years. They have a low default rate – infact most people in the EWS and LIG categories take pride in repaying their debts. Besides, the products of these HFCs are more accessible to the self-employed who sometimes find it difficult to get credit from a traditional lender.
The demand for low-cost homes should continue over the next decade. The sustained focus of the
government and the tailor-made schemes of HFCs are likely to help. Though in every affordable housing project, the key is the right “location”, however, it is important to focus on investing into creation of infrastructure as well. These include setting up a facility to transport customers to key employment drivers or key transport hubs within city or creation of social infrastructure within the project. Developers may even need to work closely with the local government authorities to facilitate transport. What one needs in this sector is a manufacturing/ corporate way of working. One should aim to complete the entire project within 12-18 months to keep costs and overheads under control. Construction should be done using pre-cast/Modular methods and use of lean manufacturing principles. Light weight construction with minimal wastage and component based designs aimed towards value engineering are the need of the day.
Affordable housing projects are infact a great opportunity for corporates with access to capital and a
brand to capitalize!
The article is authored by Divya Seth, Associate Director, Valuation & Advisory, Colliers International India