Talking Point. A place to call home

We often hear people talking about ‘Affordable Housing’ in India and how it is an attractive investment opportunity. Affordable may mean different things to different people in different markets. For example, in Mumbai, a 1BHK flat costing ₹50 lakh in a central area may be termed as affordable, whereas people from Chennai may consider ₹30 lakh to be a fair price for a similarly located property.

In reality, affordable housing refers to housing units that are affordable by that section of society whose income is below the median household income. It should address the housing needs of the lower or middle-income households (LIG and MIG).

Affordable homes can be considered based on income level, size of dwelling and affordability. While the first two parameters are independent of each other, the third parameter is correlated to income.

On an average, an EMI of 30-40 per cent of net monthly income would be the ideal benchmark. Alternatively, the ratio of house price to annual income could be around five.

Official figures state that India faces a shortage of around 18.78 million homes, of which 10.55 million are required for the economically weaker section (EWS) and 7.41 million for the lower income group (LIG) section. It is further estimated that another 15 million households are situated in “unacceptably congested conditions”.

The government has initiated the Smart Cities Mission, Atal Mission for Rejuvenation and Urban Transformation (AMRUT) and Housing for All by 2022 to develop tier II and III cities and towns as new engines of growth, thereby reducing reliance on the metros. These initiatives, combined with a reduction in key lending rates and the latent demand for affordable housing across the country, will manifest as higher sales velocity.

Also, the passing of the Real Estate Regulation & Development Bill will give ‘Affordable Housing’ the Infrastructure Tag. This, in turn, would mean lower borrowing rates and tax concessions. Affordable housing works on thin margins and not many developers are keen to consider it. But this may change with cheaper and long-term funding. Also, the Bill may result in the government releasing more land parcels in central locations and increased institutional funding into the sector.

That said, there are multiple concerns that are hampering the growth of the sector. These include lack of availability of cheap land, hassles in land acquisition, red tape and delays in regulatory approvals. Also, high interest rates on housing loans, thin profit margins for developers as well as dilution of land by developers act as deterrents. In many cases there are large delays or non-delivery of projects, which jeopardises the affordability goal. These issues could likely be addressed in a few ways.

One, the Aadhaar platform could be used by the government to identify the actual beneficiaries based on the socio-economic class. Financial assistance by way of customised lending packages can be created given the ability to repay the loans availed by the LIG/MIG segment. To ensure quality of houses, grants must be given for enhanced research facilities wherein foreign technology can be adopted to build condominium-style houses in India. Also, the maintenance cost associated with the building should remain low over the life of the asset.

The government could also incentivise builders with increased floor space index (FSI) and transferable development rights (TDR) to create or earmark a portion of their projects for low-cost housing.

This must happen on a wider scale with more FSI/TDR benefits being linked to time-bound development of such projects. A cyclical pattern can be observed amongst the concerns of various stakeholders, namely, the government, developers and financial institutions wherein every party is dependent on the other and is literally waiting for the other to act. One needs to look at affordable housing from at least a 20-year horizon while making an investment and have the “will” from all the stakeholders by slightly adjusting their interests towards a wider social cause.

The writer is Executive Vice Chairperson, Milestone Capital Advisors

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