Affordable Housing Could be Key to India Real Estate Revival

Affordable Housing for All was first planned as an objective in the National Urban Housing and Habitat Policy (NUHHP), 2007 of India. It rose to prominence in the aftermath of the Global Financial Crisis (GFC) of 2008 when muted real estate demand and the economic slowdown prompted Indian real estate developers to focus on affordable housing.

However, the biggest boost came when the Government of India launched the Pradhan Mantri Awas Yojana (PMAY) – Urban in June 2015.

Affordable housing in India is defined as a house or a flat with carpet area up to 90 square metres in non-metropolitan cities and towns, and 60 square metres in metropolitan cities and having value up to Rs 45 lakh, for both. The Government and the Reserve Bank of India (RBI) have taken numerous measures to give a boost to this sector over the past few years. Affordable housing is also included under RBI’s priority sector lending programme. Driven by numerous incentives, the sector witnessed significant growth in supply during 2016 and 2017.

The share of Rs sub-5 mn ticket size segment in total launches grew from 51% in H1 2016 to 70% in H1 2017 as developer interest in the affordable housing segment increased. The joint efforts of government agencies to incentivise affordable housing have generated positive outcomes on the supply side, but various challenges continue to hamper the pace of affordable housing development in India. Lack of suitable low-cost land parcels within the city limits, lengthy approval process and multiple clearances, lack of access to cheap credit for construction finance, low profit margins are a few such challenges.

This has limited the participation of large, organised real estate players in affordable housing projects. Affordable housing sales have failed to gather momentum despite the conducive environment. Sales in the Rs sub-5 mn ticket size segment have been declining in terms of volume as well as share in total sales. For instance, share of sales in the affordable housing segment in the total All India residential sales have dropped from 60% in H1 2016 to 47% in H1 2020. The sale of affordable housing segment fell by 8% YoY in 2019 on the back of 0.3% YoY fall in 2018.

While a definitive cause is still to be ascertained, a few possible reasons could be the need for further government incentives, frail economic conditions impacting employment and income levels resulting in risk-averse buyer sentiments, challenges in implementation of government incentives, difficulty in credit availability due to the Non-Banking Financial Company (NBFC) liquidity crisis, and the millennial mindset to be asset light preferring to rent instead of purchase.

Covid Pandemic Effect on Indian Real Estate

The outbreak of the Covid-19 pandemic and the subsequent lockdowns have had significant impact on all businesses, including real estate. All construction activity had to be completely halted during the lockdown phase. Post lockdown, while cost of inputs such as steel and cement have increased, the availability of construction labour has gone down. This has not only increased the cost of construction for developers but has also caused delays in project completions. Further, as banks and lending institutions have resorted to tighter lending norms in light of the present economic situation, developers are finding it hard to avail credit. This, along with muted demand, have severely impacted developer cash flows. All these factors can create significant financial pressures on real estate developers across segments, but the impact on affordable housing players will be relatively more.

The cost-time-revenue matrix of affordable housing projects is extremely critical in keeping these projects financially viable for developers. In the present situation, as all three variables of the matrix have been adversely impacted, developers will find it increasingly difficult to complete their projects. This may drive away developer participation even further and thus impact affordable housing supply in the market. On the demand side, home-buyers are likely to postpone or cancel their home purchase decisions in light of the frail economic conditions. Job uncertainty, pay-cuts and the tight lending norms are likely to be impediments to affordable housing demand, especially in the Low Income Group (LIG) segment. In H1 2020, affordable housing sales have fallen by a sharp 57% YoY.

While the affordable housing segment will be adversely impacted by the crisis, the revival of this segment could be faster as the economy moves towards normalcy. This segment can grow rapidly if the necessary factors such as incentives are in place. Also, as affordable housing is an end-user driven market, the prevailing low property prices and low home loan interest rates could prompt home-buyers to make their purchase decisions. Extension of the Credit-Linked Subsidy Scheme (CLSS) up to 31st March 2021 is an added incentive for the Middle-Income Group (MIG) buyers. RBI’s policy rate cuts along with National Housing Bank (NHB)’s infusion of Rs 100 bn into eligible Housing Finance Companies (HFCs) are likely to help revive supply momentum of affordable housing projects.

The extension of Real Estate Regulatory Authority (RERA) deadlines for project completions will give the developer community a much-needed breather. Also, as incidence of reverse migration in the country was strong in the wake of the ongoing crisis, it could result in an increased demand for affordable housing in Tier-II and Tier-III cities. On the whole, the affordable housing segment has the potential to recover faster than other residential segments. The target audience of this segment are the LIG / Economically Weaker Sections (EWS) and MIG earners who form a sizeable chunk of India’s total population. If sufficiently incentivised, the affordable housing sector could benefit significantly from the sheer size of its target group.