Podcast | Deep Dive - Affordable housing and the real estate market

The nuts and bolts of the Yojana go something like this: the scheme will provide an interest subsidy of 6.5% on housing loans taken by the beneficiaries/participants for a period of 20 years under credit link subsidy scheme (CLSS) from the start of a loan. The govt claims these houses will be built with technology that is eco-friendly. The minimum size of the house has been increased to 25 sq. mts in the rural scheme, from the earlier 20 sq. m. and includes a hygienic cooking space. Further, when allotting ground floor occupation under PMAY, preference will be given to differently abled and older beneficiaries.

To kick off the scheme, the government approved an investment of $6.5 billion for the construction of 6,83,724 houses. This included a central assistance commitment of US$1.5 billion by April 2016.

The eligibility criteria are pretty simple – the beneficiary must be below 70 years of age, average annual income of less than 3 lakhs for EWS beneficiaries and 3-6 lakhs for LIGs. And, of course, the person should not have a house in his or her name anywhere in India. There’s another stipulation that stands out: houses given under this scheme will be owned by females or jointly with males. The government has identified cities and towns in 26 states to begin construction of houses. The stated goal is to build 20 million homes within the next 4 years!  The Economic Times reported that the Centre is providing money to implementing agencies and urban local bodies through states to build these affordable houses in 4,025 cities and towns. This year’s Budget, announced in February, committed assistance for building 3.7 million houses in urban areas in 2018-19. Some private lenders are also providing subsidised home loans under this scheme.

The centre has given top billing to housing and put it on a growth trajectory by offering tax and fiscal incentives for builders and consumers. Its own efforts, of course involve a systemic overhaul – For instance, structural reforms and single window clearances that they claim will improve transparency and disclosures to attract domestic and foreign investments.

So how are things progressing for this grand welfare scheme, and how is it helping the dormant real estate sector?

During this week’s interaction, the PM claimed over one crore houses have been constructed. A report in Financial Express says more than 1,65,000 people have availed the Credit Linked Subsidy Scheme or CLSS vertical of the Pradhan Mantri Awas Yojana (Urban) during 2015-18, according to the housing and urban affairs ministry.

However, financing affordable homes in India is a complicated process. A majority of low-income households are employed in the informal sector and do not possess reliable documentation of income. This makes it difficult for them to obtain housing loans from banks and traditional housing finance companies. In addition to these, there are other inadvertent barriers. While the subsidy has reached thousands of needy borrowers, some analysts say it has had little impact on affordability because customers only know whether they are getting the CLSS after receiving a loan, and hence cannot factor it into their home purchase decision.

“In order to assess the income, assets and repayment capability for such customers, they (affordable housing finance companies) developed field-based, detailed credit assessment and verification processes,” says a report by FICCI or the Federation of Indian Chambers of Commerce and Industry. So while there exists a demand-supply gap of 20 million in the housing sector, it will take between eight and ten years to fill the demand-supply gap, according to Rashesh Shah, president of FICCI.

FICCI noted that AHFCs have grown from a combined loan book of close to Rs1,000 crores in March 2013 to more than Rs27,000 crores by December 2017. That is an average loan ticket size of Rs9.3 lakhs. “They have facilitated the ownership of more than 230,000 affordable homes,” the report noted, adding that the potential continues to be huge.

While the govt, via this year’s Budget, has allocated Rs6,500 crore through Gross Budgetary Support and Rs. 25,000 crore through Internal and Extra Budgetary Resources, the total requirement requires support from market investment on a large scale. If an average house under this scheme costs Rs 10 lakh, with Centre and State Government subsidy components coming to approx. Rs4 lakh, we’re looking at an investment requirement of about 2.2 lakh crore in just FY19 alone. Affordable housing finance, in total, is estimated to be a 6-lakh crore business opportunity by 2022, according to the Indian Express.

For their part, industry leaders are making all the right noises. Ravindra Sudhakar, co-chairman, ASSOCHAM National Council on Affordable Housing, told Moneycontrol, “While the progress made in housing sector development is commendable, it must be driven at an accelerated pace… We - financiers, builders, banks -must accelerate our efforts...” He also makes another interesting observation. He suggested the area caveat be done away with so more people could benefit from the CLSS scheme. “…those wanting to upgrade to bigger homes should be allowed to avail of the benefits under the scheme. This would be a large number, almost double the current number," he claimed.

Problems in implementation aside, the centre’s push for affordable housing could be just the shot in the arm the real estate sector requires. If there is one industry that has weathered a tumultuous time these last couple of years, it was real estate. Especially the residential segment. The residential market has suffered a slowdown due to inflated prices, projects launched based on over-estimations of the size of the luxury market and the consequent unsold inventories, and a slowdown in rentals. These led to an overall disinterest from homebuyers.

The sector was then rocked by the introduction of RERA or the Real Estate Regulation Act. Experts have called RERA arguably the single most important legislation towards corporatisation of the real estate sector. Before RERA, the deck was heavily stacked in favour of developers and customers had little recourse and often at the mercy of the developers. RERA changed the way this sector went about its business. Under the new law, developers had to ensure they had all approvals prior to launch; separate bank accounts and escrow mechanisms to ensure that monies collected from customers would be spent primarily on construction; changes in the way monies could be borrowed and repaid to lenders; ensure last mile funding even if sales were not going to be adequate, etc.  Delays will be held accountable and penalties for transgressions are hefty. All this meant a large investment in people, systems and new processes.

GST and demonetisation were the two big events that dealt blows to the sector before RERA came along. Many projects had ground to a halt for a while during demonetisation. GST too involved new systems and processes. Now, loans taken by real estate developers are being exchanged for newer ones, often with higher amounts, and longer moratoriums to deal with changed scenarios. While rates as a whole have declined, bank loans are being replaced with loans from NBFCs at a higher cost. It is clear now that the size of the luxury market was overestimated and products aimed at the mid-segment are more in demand and display better sales traction. Developers have gone back to the drawing board designing smaller, more practical units, which would bring these within the realms of affordability. This is where the PMAY could act as a savior, to some extent. But there could be challenging times ahead.

The government’s drive for Housing for All by 2022 has pushed several big real estate firms to venture into affordable housing. However, most remain reluctant to bet on low-cost homes for those who are classed as economically weaker sections (EWS), the group with the highest demand for housing. Under the affordable housing platform, most large developers are building homes with prices ranging from Rs30 to 80 lakhs. These are technically not low-cost housing—homes catering to EWS for anywhere in Rs3-25 lakh range.

“We haven't really gone into the depth where the real demand is. The real demand comes from people whose annual household income is sub-Rs3 lakh. These are the people who can afford homes for Rs7-8 lakh. Ninety-five percent of the demand is low-income group (LIG) and EWS,” said Saurabh Mehrotra of Knight Frank Ltd, a property consultant firm.

At present, only a few builders like Tata Housing Development Co., Mahindra Lifespaces Developers Ltd and Brick Eagle Group operate in the low-cost space. Others like Shapoorji Pallonji Real Estate, Puravankara Ltd, Hiranandani Communities and Brigade group have launched homes costing up to Rs60 lakh under the affordable housing platform.

Margins for low-cost homes range up to 20% while in mid-income and luxury housing, it can go up to 35%, according to developers. Despite the government’s decision to raise the carpet area applicable for interest-linked subsidies under the Pradhan Mantri Awas Yojana-Urban (PMAY-U), builders are hesitant about building low-cost homes because the buyer base is unorganized, coupled with funding and infrastructure challenges. Instead, mid-income projects, between Rs25-50 lakh have emerged as the sweet spot.

Lack of funding from bankers and private equity investors has also led developers staying away from building LIG and EWS homes. Even as housing finance firms and banks focus on retail loans, they have not been attracted to finance LIG projects due to a low rate of return and the risks involved.

“Margins are low and if a project gets stalled, it eats into the entire margin. It is riskier. Pure project finance is difficult and there is no vibrant market there,” said Ashwini Kumar Hooda of Indiabulls Housing Finance Ltd.

Rajesh Krishnan, founder and CEO, Brick Eagle group, said funding has been a big challenge as banks are tilted toward lending to premium homes. “There is enough demand for low-cost homes but the challenge lies in executing the projects. Not having the right regulatory framework, lack of large land parcels and not enough support for local developers are a few of them,” he said.

Reports indicate that affordable housing reflected a y-o-y growth of 27% between January and September 2017. The share of housing supply in the housing segment with capital value below Rs 4,000 per square foot has increased to 28 per cent in 2017 from 23% in 2016. The housing shortage, earlier projected at 18.78 million in 2011, has been revised to approx. 10 million units as of 2017 through subsequent assessment by the govt. All things considered, the affordable housing segment is on an upward growth trajectory.