How Affordable Housing Can Change the Way Construction Works in Indian Real Estate

Urban India today houses 460 million people, making up 33.6% of the country’s population. By 2030, this percentage is expected to increase up to 40% or approximately 600 million urban dwellers.

The influx of population into urban areas is stimulated by the attraction of better employment opportunities, better education facilities, improved standard of living, etc.

Given the scenario, it becomes necessary to fill the existing gaps in the strained urban infrastructure, especially housing. Amid the growth of the urban population, the government launched the PMAY-U (Pradhan Mantri Awas Yojana – Urban) to provide affordable housing to the masses in the urban areas.

As per the data presented to the Lok Sabha, the government approved a total of 15,263 projects under the PMAY-U scheme aiming to provide more than 7 million new houses. By the end of the year 2018, it has been noted that about 20% of this target is already complete, while 50% more (3.7+ million) is set on the ground for completion within next three to four years.

There is a clear gap between the supply and demand of housing units in the growing urban cities, and it is unlikely to see a slowdown in the next 10 to 15-year period.

Existing Demand Supply Equation in the Indian Real Estate

The real estate market in India is experiencing a lack of transparency and clearly defined construction workflows. As a result, the construction of large affordable housing projects is delayed, far too often. Given the lower margin of profitability in this business and delay is resulting in significant erosion of profits.

According to a recent report, approximately 5,61,100 housing units, worth Rs. 4.5 lakh crores are either incomplete or still waiting for approval in major residential markets across the country, including NCR, Chennai, Kolkata, Hyderabad, and Pune.

Here, if we assume that many such housing units will be completed shortly, the average price of these properties would be a little more than Rs. 80 Lakhs (at the current valuation). If we consider that many of these households will use home loans to fund their property purchase average minimum income of the buyers will need to be more than Rs. 13-15 Lakhs per annum. As per the wealth report, in 2015 less than 10% of Indian households boasted of this kind of income. However, the largest segment had the income levels of below half of this amount; i.e., Rs. 5-7 lakh p.a. or less.

The demand-supply gap estimated for these years was above 18 million units in urban areas in the 2015-16 period. With accelerated urban population growth, this gap would only have increased over the past three years.

Affordable Housing Projects & Developers

Affordable housing seeks to bridge the demand-supply gap in the urban housing segment by serving to the largest buyer segment.
Affordable housing launched by the government under their “Housing for All by 2022” initiative has now been accorded “infrastructure” status, which implies that real estate developers in this segment will have access to cheaper loans.

The government has also provided for a reduced GST rate of 1% for affordable housing properties. In addition there is a tax moratarium for developers building under this PMAY scheme. And last but the not the least the government is providing a subsidy for the buyer as well.

These benefits are applicable for housing units acquired or constructed under the Credit-Linked Subsidy Scheme (CLSS) for Economically Weaker Sections (EWS); lower-income category (LIG) and middle-income categories (MIG-I and MIG-II) under the Pradhan Mantri Awas Yojana (Urban) or Housing for All (Urban) Mission.

Moreover, the carpet area of a housing unit for MIG I category (individuals with annual income between 6 to 12 lakhs) and MIG II category (individuals with annual income between 12 to 18 lakhs) has been revised to 160 sqm and 200 sqm respectively.

Thus, affordable housing comes as an opportunity for real estate developers to target a much broader buyer segment by constructing smaller units at a lower price point, and have a lesser tax liability.

Riding the Affordable Housing Demand Wave

Affordable housing opportunity comes with its own unique challenges. However, the two most compelling challenges stand out as:

  1. Reliability of the Builder
  2. Timely delivery

Enrolling in RERA and staying compliant to the affordable housing conditions will create a bridge over these challenges. However, other typical challenges will also need addressing, and affordable housing builders will need to plug the time delays and cost overruns and be more efficient.

Perform Demand Analysis

Affordable housing projects will be successful if they have access to different modes of transportation, quality healthcare, education, better connectivity, and proximity to community services. Therefore, it is crucial to analyse and optimize the allocation of planned residential projects for the right buyer group.

Otherwise, developers would have to deal with vacant or unsold inventory. A bottom up approach here would be to consider the distribution of target buyer population and their ratio in areas identified for constructing housing units.

Moreover, factoring in location and connectivity will help developers cater to the basic requirements of their buyers and ensure better returns for the investors.

Prepare Cash Flow Plans Early

Along with demand analysis, it is also crucial for developers to prepare detailed cash flow plans early into the project lifecycle. Doing so, will not only help smoothen out the financial flows but also manage risk effectively.

A definitive cash flow plan and budget help the developers adhere to the payment schedules, through the life of a project. With affordable housing projects, the PPP (Public-private partnership) model forms a crucial part of the project’s cash flow plan as it provides significant subsidies.

Using latest cloud-based construction ERP software builders can address the planning needs at a very granular level.

Enhance the Project Execution Ecosystem

When it comes to developing affordable housing properties, capacity building is essential for developers, in terms of creating scale. An understanding of the best construction technologies both on site and off site along with the right training can help developers create organizations that can operate at a massive scale. Technology can be a key enabler for this.

On the other hand, building capacity in the contractor and subcontractor ecosystem also helps eliminate any bottlenecks that may arise while introducing large scale new construction technologies.

Affordable Housing A Great Opportunity

The government’s push towards providing affordable housing is helping the realty industry gain traction and attract both small and large real estate developers and investors. Affordable housing segment presents a tremendous opportunity for both foreign and domestic investors, due to the enormous unmet demand for homes. With the advent of RERA and the government’s “Housing for All by 2022” and Pradhan Mantri Awas Yojana (PMAY) schemes, there is an increased impetus for this sector. Technology platforms and real estate ERP systems can go a long way in helping create that scale.

Key References

https://www.iiflwealth.com/newsroom/in_the_news/iifl-wealth-index-2018-indians-wealth-expected-rise-87-5-years

https://www.fortuneindia.com/macro/india-to-have-500000-hnis-in-the-next-five-years-report/102774

https://www.livemint.com/Politics/0Aw0kdqG5QPzz4z43VVTYI/The-great-Indian-middle-class-the-promise-and-the-reality.html

Optional References

https://www.thehindubusinessline.com/news/real-estate/just-20-urban-houses-completed-under-housing-for-all/article26196045.ece

https://www2.deloitte.com/content/dam/Deloitte/in/Documents/public-sector/in-ps-affordable-housing-noexp.pdf

https://smartnet.niua.org/sites/default/files/resources/Affordable%20Housing-ICC%20-%20Final.pdf

http://www.hdfcrealty.com/pdf/Affordable%20Housing%20Report.pdf

http://www.mondaq.com/india/x/562100/Building+Construction/Delays+In+Construction+Projects

https://assets.kpmg/content/dam/kpmg/in/pdf/2018/09/real-estate-construction-disruption.pdf

https://assets.kpmg/content/dam/kpmg/pdf/2014/08/KPMG-NAREDCO-Funding-the-vision.pdf

http://wwjmrd.com/upload/real-estate-sector-in-india-challenges-and-their-solutions_1516274410.pdf

http://mospi.nic.in/sites/default/files/publication_reports/mospi_Annual_Report_2017-18.pdf

https://www.worldometers.info/world-population/india-population/

https://www.moneycontrol.com/news/business/real-estate/budget-2019-1-53-lakh-houses-constructed-under-pradhan-mantri-awas-yojana-piyush-goyal-3459291.html

Facebook
Twitter
LinkedIn

Leave a Reply

Your email address will not be published. Required fields are marked *