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Business News/ Money / Calculators/  Low cost housing, but at what cost?
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Low cost housing, but at what cost?

Affordable housing projects cost less, but are weak on amenities and rental yield

Shyamal Banerjee/Mint Premium
Shyamal Banerjee/Mint

Would you invest in a 2-bedroom house located in a metro city and costing 25 lakh? Yes? Even if it has only the basic amenities and is far away from the city centre? Many people are indeed investing in a segment of real estate called affordable housing.

The definition of affordable housing varies but usually the parameters are that the house costs up to 50 lakh and is usually located far away from the city. While the cost may be attractive for buyers, the distance can be a dampener. But with housing prices reaching prohibitive levels in bigger cities, buying a house may be out of reach for the average middle class person.

Demand meets supply

Tata Housing Development Co. Ltd was one of the participants in the Great Online Shopping Festival organized by Google Inc. in December last year. According to Brotin Banerjee, managing director and chief executive officer, Tata Housing, the company sold more than 50 apartments (totalling more than 25 crore) in just four days with 30% contribution from non-resident Indians and 40% from tier II cities.

With demand rising in this segment, bigger developers are making a foray into the affordable housing segment, which till now had seen only small developers. Bigger and more established developers such as Mahindra Lifespace Developers Ltd, Shapoorji Pallonji Group and Godrej Properties Ltd now offer affordable housing properties.

Mint Money tries to find if there really is a case for affordable housing as an investment option.

What’s good

“The ticket sizes are lower, which means higher liquidity for investors when they want to sell. It also means a much larger number of end-users who can afford to buy the flat on re-sale," said Rohit Poddar, managing director, Poddar Developers Ltd.

Not only is the capital required less, the scope of that capital appreciating in the future is much higher.

Unlike in the case of luxury homes where there is a possibility of house prices coming down, real estate analysts say that as development takes place, the prices are likely to rise in most of the areas where the affordable housing projects are located.

Sample this: a 750 sq. ft, 2-bedroom-hall-kitchen (BHK) apartment in Karjat (a locality that is about 60km away from Mumbai) costs around 20.45 lakh, according to data on Magicbricks.com, a realty portal. The per sq. ft rate in this area has gone up 6.1% between the quarters of January-March 2013 and October-December 2013. Whereas, an 880 sq. ft 2-BHK will cost around 5.5 crore in Walkeshwar (a prime locality in south Mumbai). The per sq. ft value here has risen 3.6% during the same period.

“As the cost is lesser and these areas are at the starting point of a growth graph, the expected return can be higher than that of traditional real estate. But from the infrastructure viewpoint, one needs to check the road development, power supply, and sanitation and water facilities in the area of development. If these facilities are present, and the developer is right, there will definitely be a decent growth in percentage terms in the value of the property," said Venkatesh Gopalkrishnan, executive vice-president and chief investment officer, Shapoorji Pallonji Real Estate.

Apart from capital appreciation, there is a tax angle that will work in your favour if this is your first home and you are buying it using a home loan. In the 2013 Union budget, a one-time benefit was allowed to first-time homebuyers in the form of an additional tax deduction of 1 lakh on interest paid for housing loans of up to 25 lakh, provided the value of the house does not exceed 40 lakh.

What’s not

As always, there is a flip side. For one, these projects are in far flung areas and social infrastructure in most of these places may be non-existent. If the house needs repairs or some maintenance work, it might be difficult to find a solution, especially if you stay quite a distance away.

Buying an affordable house with the aim of selling it after a few years might seem like a viable option. But Om Ahuja, chief executive officer (residential services), Jones Lang LaSalle Residential Pvt. Ltd, cautions that finding a buyer for an affordable house in a remote location could be difficult. “With no proper social infrastructure in such remote areas, the return might look good on paper. But one could end up being stuck because finding a buyer would be nearly impossible."

Another hiccup is low rental yield, which measures the return you make on the asset without considering the expected capital gain or loss. Say, you give your house, which you had bought for 25 lakh, on rent for 5,500 a month. Your rental yield on the property is 2.6% (monthly rent*12/cost of house). Pankaj Kapoor, managing director of Liases Foras Real Estate Rating and Research Pvt. Ltd, a real estate research firm, said that an ideal rental yield should be 3.5-4.0%.

Rental yields of affordable homes will be negligible since these projects are located far away from the city and their amenities may be bare minimum. Also, those who are buying such houses to live in are likely to be from the low income strata, and may not be able to pay higher rents.

According to a July 2013 study by consulting firm, Monitor Deloitte, State of the Low-Income Housing Market Encouraging Progress & Opportunity to Realize Dreams of Millions, of the total occupants in three low-income projects in Ahmedabad and Pune, only 30-40% were living on rent.

Kapoor suggests that it would be more viable, especially if you plan to rent out the apartment, to buy in a city where you can purchase a bigger and better house for the same amount.

For instance, in a city like Bangalore, you can buy 2-BHK apartments for 15-25 lakh in areas such as Electronic City and Sarjapur that are around 19km from the city centre. The per sq. ft value in Electronic City has risen 12% between January-March 2013 and October-December 2013. You could even consider investing in a property in tier II or III city.

Mint Money take

If you are looking at investing in real estate, are in no hurry for the value to rise and can compromise on the amenities and the distance to the main city, you can consider investing in a property in an affordable housing project. “If you don’t have the kind of funds that are needed to invest in a property within the bigger cities, this could be a viable option. You should look at a holding period of at least 10 years when investing in a property like this," said Binaifer Jehani, director, Crisil Research.

As these properties are mostly on the outskirts of a city, one needs to carefully hand-pick them. Try and gauge if the area has the capability of developing in the future. If it is in an absolutely remote area and there seems no likelihood of it developing in the foreseeable future, look elsewhere.

Give it a miss completely if you plan to rent out the property; you will be better off investing cities other than Mumbai and Delhi.

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Published: 15 Apr 2014, 07:14 PM IST
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