Housing shortage in the country is expected to increase to 2.50 crore units by 2021 from the current level of 1.90 crore units, based on a stable decadal growth rate, according to credit rating agency ICRA.

Assuming an average ticket size of ₹25 lakh a unit, this translates into a market potential of ₹6.25 lakh crore for affordable housing projects, said K Ravichandran, Group Head, Corporate Ratings, ICRA.

With the government providing various incentives to home-buyers, targeted at the affordable housing segment, the demand is expected to be further augmented.

In addition to the large untapped market, ICRA, in a statement, said the affordable housing segment benefits from a stable demand scenario, driven by home buyers rather than investors.

Moreover, the demand for affordable housing remains largely stable during periods of downturn as well. While the demand for low-cost and affordable housing has been healthy, ICRA said the supply has been limited, with these segments largely being catered to by government undertakings or the smaller and unorganised developers. This, in-turn, has resulted in an acute shortage of housing in the low-cost and affordable housing segment.

While the long-term demand outlook for affordable housing remains healthy, the segment faces challenges largely intrinsic in nature, said ICRA.

Shubham Jain, Vice-President, ICRA, said, “For affordable housing projects, the pricing and thus, the ticket size of the units are the key defining characteristics. This, in turn, limits the headroom available to the developers for increasing the rates, resulting in thin profit margins.”

ICRA elaborated that the developer’s ability to execute the project within the budgeted cost and within time remain critical for maintaining healthy returns for affordable housing projects. With land being a vital raw material for real estate projects, the developers’ ability to acquire large tracts of land at low rates is key to the viability of the project.

Notwithstanding the favourable potential in the affordable housing segment, ICRA’s outlook on the overall real estate sector remains negative for the short term, given the weak consumer sentiment and the low affordability levels, which are expected to keep residential real estate demand under pressure.

The agency said the developers’ cash flows are expected to remain subdued, given the slowdown in sales and lack of new launches.

Moreover, the flexible payment schemes offered by developers, in a bid to boost sales, have further exacerbated the cash flow problems. The subdued cash flows have led to increased dependence on external sources of funding, as reflected by the rising debt levels.

ICRA assessed that the recent ban on high-denomination currency is expected to pose a challenge to all stakeholders in the industry and result in further demand slowdown as well as price correction across various product segments.

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