Home / Companies / Low margins keep developers away from low-cost housing projects

Mumbai: As India rides on the affordable housing wave, large developers are still staying away from building low-cost homes priced below Rs25 lakh, stymied by low margins and infrastructure challenges.

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 big developers are building homes with prices ranging between Rs30-80 lakh. 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, national director, Knight Frank Ltd, a property consultant firm.

India’s current housing shortage in urban areas is estimated to be around 10 million units, said minister of state for housing and urban Affairs Hardeep Singh Puri in January this year. Though substantially less than the earlier estimate of 18 millions units (as per a 2012 government study), the supply of homes to low income groups (LIG) and EWS is still a trickle. According to the study, over 96% of the total shortage falls under LIG and EWS category.

As per data compiled by realty research firm PropEquity, of the total housing supply that came in last year in the top 15 cities, around 28% were homes costing below Rs25 lakh.  In the first quarter of this year, only 5,313 homes below Rs25 lakh were launched as against the total of 19,513 units that came into the market.

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.

“The biggest challenge is, there is slim bottom line play (in low-cost housing). The format is very difficult in metros because of high FSI (floor space index) cost apart from density and other issues," said Getamber Anand, promoter of Noida-based ATS infrastructure that recently launched an affordable housing platform, ‘Home Craft’, to build homes priced between Rs40 lakh and Rs80 lakh.

Venkatesh Gopalkrishnan, CEO, Shapoorji Pallonji Real Estate, agrees low margins are a challenge even as the firm looks to build homes below Rs25 lakh to take advantage of government incentives, particularly a one-year tax exemption to developers.

“Margins are difficult to manage as we need to buy land also and infrastructure costs quite a bit as the parcels are far away from the city," he said. At present, the firm is developing two affordable housing projects under its Joyville brand.

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.

Funding challenge

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, deputy managing director, 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.

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