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Affordable rental housing complexes scheme for migrants: Here's all you need to know

Real estate experts are of the view that the ARHC scheme should provide risk linked returns using means such as transferable development rights, single window clearance and strong regulatory framework to attract private developers
Jul 9, 2020 / 08:57 PM IST

The Union Cabinet on July 8 approved the affordable rental housing complexes (ARHCs) scheme for urban migrants employed in the industries, service sector and manufacturing sector close to their workplace in industrial as well as in non-formal urban sectors.

Considering that rental yields in India are anything between 1.5 percent and 3 percent, will this scheme attract private participation from real estate developers?

Also, will developers who own land parcels in municipal limits be keen to develop it for the affordable rental housing (ARH) scheme given the steep prices at which they may have bought the land earlier?

Real estate developers and experts are of the opinion that the scheme to be viable, it should provide risk linked returns using means such as transferable development rights, single window clearance and strong regulatory framework to attract private developers, especially those who are into affordable housing

The entire cost of construction/refurbishment would have to be provided at priority sector lending rates which essentially should be in single digits along with priority sector and infrastructure sector tax breaks.

Also, in the case of land parcels where the developer is offering his own land parcel for the scheme, the transferable development rights method could be adopted wherein the builder is given the option to load the TDR value for one land parcel onto another project that he is constructing to realise value.

ARHC approach

According to guidelines issued by the housing and urban development ministry, ARHCs will have a two-pronged approach. First, the existing vacant government funded housing complexes will be converted into ARHCs through concession agreements for 25 years.

The concessionaire will make the complexes livable by repair/retrofit and maintenance of rooms and filling up infrastructure gaps like water, sewer/septage, sanitation, roads. States/Union Territories will select concessionaire through transparent bidding. Complexes will revert to urban local bodies (ULB) after 25 years to restart next cycle like earlier or run on their own, the ministry said.

Second, special incentives like use permission, 50 percent additional FAR/FSI, concessional loan at priority sector lending rate, tax reliefs at par with affordable housing will be offered to private/public entities to develop ARHCs on their own available vacant land for 25 years.

Beneficiaries could be labour, urban poor such as street vendors, market or trade associations, industrial workers, manufacturing units, long term tourists, visitors, hospitality sector, students, educational or health institutions.

Applicability

The ARHC scheme will be applicable for consideration and funding till the PMAY (U) Mission period which is March 2022. All projects under ARHCs shall be exclusively used for rental housing purposes for a minimum period of 25 years.

This initiative emanated from the plight and migration of workers during the COVID-19-infused lockdown. Absence of affordable rental housing in major cities led to mass exodus of migrants that had zero income during the lockdown. Thus, the government had to shift gears of their Housing for All initiative and include affordable rental housing as part of it.

“The scheme is clearly an attempt to bridge the shortfall of dwelling units across the country. All states will also be asked to develop such products and encourage private partnerships. The move will not just regularise the rental housing market across the country, but it will also add another asset class to be considered by developers at large,” says Anuj Puri, Chairman – ANAROCK Property Consultants

However, many developers have significant land parcels both within the cities as well as their peripheries – the latter land parcels being prime candidates for affordable housing, including rental housing. Land parcels in the municipal limits may not be viable for this purpose, given the high land rates, he said.

Will it help? 

Other experts say that while this is a “good initiative”, there are issues that need to be addressed before it can have a tangible impact on the real estate market. The first issue is to do with the cost at which the government would offers its vacant land parcels to be developed by the concessionaire.

The second issue is the rental yield that is likely to accrue to the developer. In India, rental yields vary between 1.5 percent to 3 percent.

“Any investor would expect healthy returns which would be a combination of rental yield and capital value appreciation which in this case may be nil because the asset has to revert to the government after 25 years,” says Anckur Srivasttava of GenReal Advisers.

As for return on capital, the fundamental gap is huge as the rental yield is almost 400 bps points lower than the cost of mortgage for borrowers, he adds.

Also, land parcels should come with a clear title and provide for timely physical possession. The mechanism for rent collection should be spelt out and there should be protection provided against illegal or unauthorised property occupation, he says.

Favourable outcome

The only way authorities can expect a reasonable outcome at this early stage is by rolling out a few pilot projects with some leading manufacturing public or private sector firms whose employees would form the exclusive tenant base for these proposed developments, he adds.

According to Ashoo Gupta, partner, Shardul Amarchand Mangaldas & Co, ARHC should address the following issues – the government should provide a range of protections for renters including rent increases being limited to a specified percent e.g. 5 percent over three years, minimum maintenance standards and regulations to ensure security of tenure.

For affordable rental housing to be delivered in a timely and cost-effective manner, the process of getting approvals and permits requires to be streamlined, says Gupta.

"The success of the scheme will largely be defined on how well we conceptualise rental housing in the same spirit as other infrastructural development such as highways, roads, industrial parks,” said Shishir Baijal, chairman and managing director, Knight Frank India.

Real estate developers are of the view that in case they were to go in for the option of developing ARHCs on their own land parcels, they would require a quicker exit, a provision for TDR that would allow them to transfer the development right to another land parcel where they can make use of the increased density for new development and a lower interest rate from banks to construct these units.

“This will be a big opportunity for us if incentives are available. The most important thing here is that the scheme should be viable,” says Pradeep Aggarwal, founder and chairman, Signature Global Group and chairman, ASSOCHAM, National Council on Real Estate, Housing and Urban Development whose company is into affordable housing projects.

Also, a developer who is utilising his land parcel to develop ARHC should be allowed equivalent transferable development rights (TDR) (a method by which developers can purchase the development rights of certain parcels within a designated district) that can be loaded into another project in order to increase density of the development, he says.

While some developers are of the opinion that “the return on investment has to be at least 7 to 8 percent for the scheme to be viable”, real estate consultants say that anything less than 13-15 percent return on capital would not attract any significant foreign or domestic institutional investor interest.

Under the ARHC scheme an expenditure of Rs 600 crore is estimated in the form of a technology innovation grant, which will be released for projects using identified innovative technologies for construction. More than 3.5 lakh beneficiaries will benefit from ARHCs.

The scheme was announced by Finance Minister Nirmala Sitharaman as part of the Rs 20 lakh crore economic package to deal with the COVID-19 pandemic.
Vandana Ramnani
first published: Jul 9, 2020 08:57 pm
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