Take a closer look at affordable housing5 min read . Updated: 13 Jan 2015, 07:05 PM IST
Realty projects in this segment are increasing but much depends on livability and financing factors
Last week, Shapoorji Pallonji Real Estate, a part of the Shapoorji Pallonji Group, announced the launch of two projects in the affordable housing category. So far, national real estate companies such as Tata Housing Development Co. Ltd and Mahindra Lifespace Developers Ltd and smaller developers such as Value and Budget Housing Corp. Pvt. Ltd and Ramesh Ramanathan’s Janaadhar (India) Pvt. Ltd have ventured into the space.
With more developers and projects in the affordable housing segment, is it worth buying? Here is a look at some projects on offer, and what you should consider before buying.
First let’s understand what affordable housing means. The term refers to housing units that are affordable by the section of society whose income is below the median household income. Earlier, there was no definition and it was difficult to classify affordable housing or the price range of properties in this segment. However, last year, the Reserve Bank of India gave it some parameters. It said that any loan up to ₹ 40 lakh for a maximum property value of ₹ 50 lakh in non-metros and a loan of up to ₹ 50 lakh taken for a property value of ₹ 65 lakh in metros will be categorized as affordable housing loans. Developers, too, are looking at a similar price range, but refrain from putting a clear definition.
“There is no clear definition of affordable housing as it varies based on location and target consumers," said Brotin Banerjee, managing director and chief operating officer, Tata Housing. The company sees the segment as the middle income group of the consumer pyramid where the average household income is in the range of ₹ 5-12-lakh per annum. This would mean that the affordability for a housing purchase would be ₹ 30-60 lakh, added Banerjee. Others define it differently.
Anuj Puri, chairman and country head, JLL India, said, “While different cities have different affordability benchmarks, it is generally accepted that the purchase of housing for the EWS (economically weaker section) and LIG (lower income groups) should not entail equated monthly instalments (EMIs) higher than 30-40% of the purchasers’ gross monthly incomes."
In the past few years, some steps have been taken to address the need of affordable housing in the country, and since 2009-10, developers, too, have started focusing on the segment due to growing demand. But the focus is limited as profitability in affordable housing is lower than in other housing projects, and developers in residential housing market are already struggling with poor sales and piling inventory there. “For providing affordable housing, the developer has to reduce margins to near negligible levels. This is a big challenge," said Navin M. Raheja, chairman and managing director, Raheja Developers Ltd.
Financial institutions, however, say that majority of the loans sanctioned are for the affordable housing segment, and that this trend will continue. “To begin with, 40% of the loan book of all private and public sector banks should cater to priority sector lending. As of now, housing loans to individuals up to ₹ 25 lakh in metros and ₹ 15 lakh in other centres for purchase or construction of a dwelling unit per family comes under priority sector lending," said Vishal Narnolia, banking analyst at SMC Global Securities Ltd.
Apart from the government push, affordable housing loans also allow banks to access long-term funding through bonds, added Narnolia.
“Our flagship product for the low-income group is Asha home loans, which specifically cater to customers with family income of ₹ 8,000 and above per month. The product has helped us go very deep into the affordable housing segment," said Jairam Sridharan, president—retail lending and payments, Axis Bank Ltd.
A decision to buy such a house for self-consumption has to be taken based on two factors—suitability of house and financing.
The project has to be suitable for your lifestyle. Since cost of land is higher within city limits, most affordable housing projects on offer are in suburban or peripheral areas. A project that’s too far or lacks infrastructure facilities does not make a sensible purchase. “Apart from the very critical price factor, home buyers must also ensure that the options being considered provide adequate amenities and appropriate location," said Puri.
Before deciding make sure the project has basic amenities such as sanitation, water supply, electricity and so on. “Also consider provision of community spaces and amenities such as parks, schools and healthcare facilities, either within the project or in the neighbourhood," added Puri.
Besides that, as in any other real estate project, “the most crucial factor is the reputation of the developer. Additionally, documentation of the project must be in order," said Raheja.
How does one assess a project? “The project viability can be calculated on the basis of accessibility, connectivity, fringe benefits such as open spaces away from chaos, and social conveniences such as shopping facilities, schools and hospitals," said Banerjee.
The second factor on which the decision to buy an affordable house is its financing.
When you choose a home loan for any kind of housing, you should go beyond the interest rate. “Start with checking out the loans offered for the project that you plan to buy. When it comes to affordable housing, not all banks and non-banking finance companies (NBFCs) offer loans for all projects," said Rishi Mehra, founder, Deal4loans.com.
“The next step is to compare the interest rate offered by various financial institutions and find the cheapest option. Also, don’t pick the longest tenor loan as this will mean that your interest outgo will be higher," added Mehra.
Another decision to take is regarding the kind of loan you will take—floating or fixed interest rate. Now is also not the right time to go for a fixed rate loan. “In the current environment, you should not opt for a fixed rate loan as interest rates are likely to come down. It would make sense to stick to floating rate loans," said Dilshad Billimoria, founder and chief financial planner, Dilzer Consultants Pvt. Ltd. Apart from these, do check processing charges, documentation process and prepayment penalty in case of fixed rate loans.
Affordable housing can be viable option for a buyer, provided factors such as availability, livability and cost are suitable.