After selling luxury homes to top bankers and Bollywood stars, Sunteck Realty Ltd has decided to build more modest, affordable apartments to suit middle-class pockets this year. The federal budget presented by finance minister Arun Jaitley on 1 February provided the cue for it to change tack.
“Affordable housing typically works with lower margins, and the budget compensated that with good tax benefits. We think it’s a good idea to add a new brand to our portfolio now and build a separate business vertical," said Kamal Khetan, chairman of the Mumbai-based real estate firm.
Khetan wants to create an asset-light model, wherein he will build projects jointly with other developers and stick to the market he knows best—Mumbai and its suburbs.
Sunteck Realty is one of the many real estate firms that have announced plans to enter the budget housing space after Jaitley proposed a raft of incentives for developers of affordable homes.
Typically, in low-income housing projects, a 350-400 sq. ft one bedroom-hall-kitchen (BHK) flat costs around Rs15-20 lakh. A 450 sq. ft apartment targeted at middle-income earners costs Rs30-35 lakh.
India’s real estate sector has been stuck in a downturn for close to four years now. The first signs of recovery were becoming visible in October, but the withdrawal of high-value currency notes on 8 November cut it short. Property sales slumped in the last two months of the year.
Spurring affordable housing
Jaitley’s proposed infrastructure status for affordable housing will stimulate the wider investor community, along with measures to improve access to funding avenues such as insurance and pension funds for real estate developers to boost the supply of budget homes. The federal budget also promised developers better credit facilities.
The provisions allow potential homebuyers to secure longer-term, cheaper funding while also opening up additional avenues for developers to raise funds.
Most real estate firms agree that the government has done whatever it could to boost the lower end of the housing market. It was also in sync with the latter’s aim of providing ‘housing for all’ by 2022 and to complete 10 million houses for the homeless and those who live in mud houses by 2019.
Mahindra Lifespaces Developers Ltd, a unit of the Mahindra group, will launch its third project, after Chennai and Boisar near Mumbai, under its affordable housing brand, Happinest, this year. The project is in its last leg of securing statutory approvals and will have more than 700 homes on a 10-acre land parcel.
“While we have been building in this space for the past three years, the recent incentives that propose to improve the viability of such projects have helped in evincing interest from more private developers which will also help the whole ecosystem to develop. As a result, innovative building material and technology will also come in," said Sriram Mahadevan, business head, Happinest.
Measures that would incentivize developers to build affordable housing include permission to complete such projects in five years instead of the existing requirement of three years to qualify for tax exemption. Developers are also allowed to keep their unsold inventory without attracting any income tax liability for up to one year after receiving the completion certificate.
The National Housing Bank will also refinance individual loans worth Rs20,000 crore, which is a big push for both buyers and affordable housing finance firms.
Rapid growth foreseen
India’s housing shortage at the beginning of the 12th Five-Year Plan (2012-17) was estimated at 18.78 million units, according to a report by the ministry of housing and urban poverty alleviation.
Despite the sharp drop in sales in recent years, demand has remained strong for low- and mid-income housing in most large and smaller cities, with both sales and project launches faring better than premium counterparts.
A February report by real estate advisory PropTiger said the affordable segment accounted for around 54% of the cumulative sales (43,512 units) witnessed across India’s top nine cities during the quarter to December.
In a 14 February note, Rohit Inamdar, group head of financial sector ratings at rating company ICRA Ltd, wrote: “While growth in the prime home loan segment could witness moderation, affordable housing segment is likely to grow at a faster pace than industry, with efforts being made to address the supply, demand and affordability issues."
Compared with premium project launches, which have significantly dropped in the past year or so and will likely remain tepid in 2017 as well, budget housing projects have not seen any slowdown in launch momentum.
Mumbai-based Shapoorji Pallonji Real Estate is gearing up to launch two large projects in suburban Mumbai’s Virar and in Hinjewadi, on the outskirts of Pune. Together, both these projects spread across 40-42 acres will bring around 3,200 units to the market, at an average price of Rs30-50 lakh.
In January 2016, the real estate unit of Shapoorji Pallonji and Co. Pvt. Ltd launched its first project under the brand Joyville at Howrah, near Kolkata, where it will sell around 3,000 homes, with a 500 sq. ft one-bedroom unit costing around Rs20-22 lakh.
Under the Joyville brand of affordable housing, it aims to build 20,000 homes in seven years, investing about Rs5,500 crore.
“We want to acquire another three land parcels in at least two southern cities and another in NCR, which will give us a proper geographical spread," said Venkatesh Gopalkrishnan, executive vice-president and chief investment officer, Shapoorji Pallonji Real Estate. NCR is short for the National Capital Region centred on New Delhi.
What has also generated a lot of interest and widened the scope of taking on such projects is the fact that the budget has redefined the projects that can be classified under affordable schemes. Hundred percent tax deduction will be allowed on profits on houses of up to 322 sq. ft and 645 sq. ft in built-up area, in the top four cities and the other cities, respectively.
The area will be calculated on a carpet-area basis, bringing more projects under its ambit. Carpet area means the actual livable area in a unit while built-up includes the elevator area, balcony and lobby. The change means larger homes come under the ambit of affordable housing.
Gopalkrishnan said this has enhanced the scope for developers and of what can be called affordable.
In 2009-2010, the economic slowdown of 2008 had toned down the exuberance of the preceding years when prices hit the roof and the middle-class homebuyer suddenly had nothing to buy. Big developers saw sales screeching to a halt, and capital drying up. It was then that a clutch of private developers and entrepreneurs decided to build low-cost or so-called affordable housing.
Tata Housing Development Co. Ltd launched its Shubh Griha brand, Ramesh Ramanathan’s Janaadhar (India) Pvt. Ltd in Bengaluru launched a project in suburban Attibele and entrepreneur Jaithirth Rao founded VBHC Value Homes Pvt. Ltd and launched a project in Bengaluru.
However, as the property markets started to revive, some of them decided to focus on premium housing to boost margins.
This year, Tata Housing plans to return to building homes in the Rs15-20 lakh price range after focusing on mid- and high-end projects in recent years.
Returning to affordable homes
Its affordable housing arm, Tata Value Homes, has a $90 million investment partnership with World Bank arm International Finance Corp. (IFC) and CDC, UK’s Development Finance Institution (DFI), to provide affordable housing for low-income households. “We haven’t been able to do such projects in the past two years from a profit perspective and because of land availability issues; but because of the tax breaks and other incentives announced in the budget, we want to return to this segment," said Tata Housing managing director and chief executive Brotin Banerjee.
This year it plans to sign up one project under its Shubh Griha, on a 50-acre land parcel, in the outskirts of Bengaluru, he said.
VBHC Value Homes also expects to launch a 30-acre project in Neemrana, Rajasthan, with homes priced at Rs15-30 lakh, sometime this year. It will also launch new phases in its existing projects in Palghar and Vasind in Maharashtra and Kenger near Bengaluru.
The joint development or joint venture route in developing such projects is preferred above outright land purchases, which are more expensive and often time-consuming by nature.
The budget proposed that for joint development agreements (JDAs) signed for the development of property, the liability to pay capital gains tax will arise in the year the project is completed—a big positive for realty firms that earlier had to make this payment upfront.
The deferment of capital gains tax on JDAs would help reduce the cost of land for developers. Also, reducing the long-term capital gains holding duration from three years to two years will help bring transparency to transactions in the secondary market.
Government schemes such as Pradhan Mantri Awaas Yojana (PMAY), the housing for all project, have also been made more broad-based. Prime Minister Narendra Modi said in January that two new mid-income categories have been created under the scheme in urban areas.
Modi said loans of up to Rs9 lakh taken in 2017 will receive an interest subsidy of 4% and loans of up to Rs12 lakh taken in 2017 will receive a 3% subsidy.
Realty firm Emgee Group announced its entry into affordable housing last year and plans to build 300-500 sq. ft homes priced between Rs8-16 lakh under PMAY.
“We are developing a 100-acre township with 20,000 homes, with 5,000 homes in the first phase, where homebuyers can avail of PMAY’s credit-linked subsidies," said chairman and managing director Mudhit Gupta.
In a tough market, it’s a good sign if large developers are eager to expand their customer base and cater to homebuyers across price segments by lowering their entry prices, property analysts say. But that’s not enough.
“Affordable housing is the need of the hour but mainstream developers need to create completely independent entities to build affordable homes, that have no overlap with their regular real estate business. It needs a start-up approach where you learn the ropes of the trade and deal with it in a fresh manner, without the baggage of regular property development," said Gulam Zia, executive director, advisory, retail and hospitality, Knight Frank India.
‘Much abused term’
What does affordable really mean?
“Affordable" in the urban housing context is a rather loosely used term. While the government does seem interested in providing housing for all, homes in the sub-Rs15 lakh category, which has the highest demand, hasn’t really picked up much.
In Mumbai and its suburbs, Rs60-70 lakh homes are also termed affordable, as developers struggle to build and sell at a lower price.
Developers such as Tata Housing and VBHC, for instance, started by building Rs10 lakh homes, but soon had to scale up pricing because of the inherent challenges in building homes for those in the lower income group.
“Affordable housing is a much abused term and there is not enough that has been done in urban areas. We are constantly scouting for local developers who we can partner with and those who have the skill to build such projects," said Rajesh Krishnan, founder and CEO, Brick Eagle Group, which funds and incubates affordable housing firms.
In 2017, Brick Eagle will launch a 39-acre project in Coimbatore, Tamil Nadu, with local realty firm Namma Veedu, targeted at economically weaker sections (EWS) and low-income earners. Studio units, 1BHK, 2BHK apartments will be sold for Rs6-18 lakh.
In Pune, Brick Eagle will launch around 1,000 units at Rs10-25 lakh.
Not all developers will launch separate affordable housing arms but everyone is trying to build smaller and cheaper homes. Affordability is a key factor when buying a home in a slow market and customers want better deals, discounts and lower prices, property analysts said.
“There is no fluff in the mid-income or affordable housing segment because there are real buyers. Developers are trying to offer more reasonable products at cheaper prices as it’s a matter of survival now, particularly in a market like NCR," said Anckur Srivasttava, chairman, GenReal Property Advisers Pvt. Ltd.
A number of corporate entities ventured into the affordable housing space in recent years to tap the rising demand for such homes, but the pace has been slow and supply has been outpaced by demand.
Mahindra’s Raghavan said the two projects it has launched have done well but the situation would have been happier if the pace was faster. The firm, which is now looking to scale up its affordable housing business, has been waiting for approvals for its third project for a year now.
Easier land acquisition, faster project approvals, ideally a single-window clearance system and better infrastructure and connectivity are on the wish list of most developers.
Shapoorji Pallonji’s Gopalkrishnan said the firm is looking at the mid-income segment in affordable housing, though there is a lot of demand in the low-income space.
“The challenge to build homes under Rs30 lakh is to manage cost structures effectively and maintain profit," he said.
Another big gap in this space is the lack of rental housing. A substantial floating population moving to cities also demands ample supply of rental housing but there isn’t enough supply. “Affordable and rental housing go hand in hand because both address basic housing needs of home buyers. However, there is no structured or organized effort to address rental housing issue," said Knight Frank’s Zia.