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15th December, 2008  Source:Asani Consulting

‘World of Opportunities’ - Fiscal Stimulus Package to boost affordable housing

‘World of Opportunities’
Fiscal Stimulus Package to boost affordable housing
Asáni Consulting Private Limited
December 2008

Public policies promoting affordable housing in the country represent a win-win proposition at the moment. For the real estate development business, this implies an overall expansion of the market size by extending their focus to the middle and lower-income-group (LIG) of the population. On the other hand, ‘housing for all’ remain a key priority in India’s development agenda. Low-cost housing offers a ‘world of opportunities’ to the real estate development business that could bring in much needed resilience to this sector.

The Fiscal Stimulus Package
The much anticipated ‘fiscal stimulus package’ was announced by the government on December 7, 2008; a day after the Reserve Bank of India (RBI) cut repo rate by 100 basis points. The package worth Rs 37,000 crore came as a huge relief to the industry and provides much needed resource to firefight the recession in the economy. In addition to this, government hopes to expedite infrastructure projects worth Rs 100,000 crore through faster clearances of public private partnership (PPP) projects, and ensure their easier financing through tax breaks on fund raising by the India Infrastructure Finance Company (IIFC).

PSU banks will shortly announce a package for borrowers for home loans in two categories; for loans of up to Rs 5 lakhs and Rs 5-20 lakhs, implying cheaper credit for buyers from low and middle-class segments. Restructuring of loans from the PSU banks were allowed, which was earlier restricted. CENVAT duty reduced by 4 per cent across the board (i.e. for all categories: 14, 12 and 8 per cent). This would cost the government in terms of forgone revenue of Rs 8700 crore. This also would benefit the ancillary and input industries for the real estate sector. In a nutshell, many restrictions imposed on this sector that led to escalation of costs were eased.

A critical component of social infrastructure
That affordable or low-cost housing in the Indian context could stimulate the flagging demand in the Indian real estate sector has been a topic of discussion among industry and government circles for quite some time now. Interestingly, a de facto working definition of affordable housing was spelt out in the package. This definition, hitherto missing, would pave the way towards a constructive debate on affordable housing in the country. Consequently, a consensus to adopt a time-bound, effective action-plan to housing for the mass would be easier to reach at. ‘Shelter’ is a pre-requisite for a strong social infrastructure, and even the colossal sum of US$ 500 billion planned investments over the Eleventh Plan on India’s hard infrastructure cannot complement deficiencies in the corresponding soft infrastructure sector.

Latent demand for low-cost housing
Recently, the Maharashtra Housing and Area Development Authority (MHADA) had declared 600 low-priced apartments for sale in Mumbai. These apartments were priced at around $50 a sq. ft., roughly four times that of the prevailing market rates. MHADA received around 200,000 applications for these 600 hundred apartments that were to be allotted on the basis of lottery. In Delhi too, the Delhi Development Authority (DDA) has received 850,000 applications for 5,010 low-cost apartments. Clearly, the demand for low-cost housing is very strong in India.  

Potential demand for low-cost housing in India is estimated to be over 24 million dwelling units at present. According to a Planning Commission Report, urban housing shortage in the country is expected to increase to 26.5 million by 2012. Consequently, this segment is likely to throw up a huge investment opportunity. An estimated US$ 25 billion investment would be required over the next five years in urban housing according to a Merrill Lynch report, suggesting a substantial scope of demand for housing. Appropriate policies can translate this latent demand to an actual one thereby setting in a multiplier effect in the economy. 

Need for an innovative financing system
Close to 80 per cent of the real estate development in India takes place in the residential segment. This reflects that demand for housing is a compelling one in the Indian market. In spite of declining average age of borrowers, which has come down to 35 years from 40 years, a vast untapped potential still remain in the home loan market. Housing finance companies attribute the surge in demand for home loans to tax breaks, which brought down effective cost of loans to a moderate 6%. However, it took 30 years for mortgage penetration to expand from 2.5% to 6% of GDP. In comparison to this, US mortgage loans comprise 66% of their GDP, indicating a plenty of room for growth of demand for loans in India. An innovative financial system addressing the issue of latent demand could actually spur actual demand for housing.

Early Movers
Affordable housing was not a major part of the Indian real estate sector boom. However, affordable housing has recently attracted attention from developers and PE investors. The raison d'être for channelling investment in this asset class is mainly due to an early mover advantage, volume-driven profitability, priority-sector status accorded by government and subsidized land costs, among other drivers. Already many real estate development companies have moved into affordable housing construction. Puravankara has set up a wholly-owned subsidiary- ‘Provident Housing and Infrastructure’ which will build 64,500 houses in southern part of the country over the next five years. Omaxe has 100 per cent owned ‘National Affordable Housing and Infrastructure’, which plans to invest $20 billion over the next five years in building one million such homes. Many other developers are queuing up to foray into the low-cost housing construction business. The rush is partly explained by the response to government-led housing programs.

Seeking convergence: Some policy perspectives
In the final analysis, ‘housing for all’ objective can only be realised through collective action by industry, government and the society. A convergence of social and business objectives would guarantee this. While, government support might help in the short run, considering the billion-plus population of India, an integrated strategy is indispensible to ensure ‘housing for all’. It is precisely for this reason that private investments are necessary for the growth of this sector.

Various proposals aiming to lift the purchasing power of homebuyers have been forwarded. ‘Interest subsidy scheme’ and ‘mortgage guarantee scheme’ are discussed as ways that can reduce risks for banks and provide credit to low-cost homebuyers. ‘Refinance scheme’ for banks to finance builders and real estate developers have also been suggested. This would support developers undertaking housing projects having dwelling units with carpet area of about 400 sq. ft — primarily a one-bedroom house of about 525-550 sq. ft. Refinancing schemes could also be extended to slum development projects.

Besides rigid land laws raising avoidable transaction costs, developers face increasing costs as land prices on an average shot up by almost four-fold over last three year. Incentives like reduced land price, relaxation of restrictions on the height of construction would immensely promote low-cost housing projects. Taller buildings raise the measure of building density known as Floor Space Index (FSI).

Some states are pursuing a policy of mandatory allocation of land by the developers for economically weaker sections and low-income group. The public-private-partnership (PPP) model that has so far been able to work well for many infrastructure development projects could be tried out in the real estate sector also for affordable housing projects.

Keywords:Affordable Housing
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