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Not enough low-cost units to meet rising demand

  • Various government incentives over the past few years have pushed up demand for affordable housing, but there isn’t enough supply in the segment
  • Budget 2019 announced extra tax deduction of 1.5 lakh on interest paid on loans taken for affordable homes

While the overall real estate sector may be floundering, the affordable or low-cost housing is still in demand, which is only becoming robust with increased government focus on the segment. However, there is not enough supply to match this increasing demand.

The latest in a series of government incentives, over the last few years, was the budget announcement of additional tax deduction of 1.5 lakh on interest paid on home loans taken for buying an affordable house. This came close on the heels of reduction in the rate of goods and services tax (GST), effective 1 April 2019. While Budget 2018 expanded the scope of affordable housing by increasing the size of units to be included in the segment, in March 2017, the government granted it infrastructure status. Budget 2016 allowed developers to avail 100% deduction on profit made in the low-cost segment, and a year before, in 2015, a credit-linked subsidy scheme was launched for homebuyers. The various government initiatives have helped boost demand.

Demand-supply mismatch

Despite growing demand, the supply of affordable segment remains poor.

According to a joint report by Knight Frank, a property consultant, and Royal Institution of Chartered Surveyors (RICS), a real estate accreditation body, Brick by Brick: Moving Towards ‘Housing for All’, “There is a huge supply gap for urban housing and more so in the Economic Weaker Section (EWS) and Low Income Group (LIG) category, i.e. houses with a ticket size of less than 2.5 million ( 25 lakh). Whereas the demand in the EWS and LIG Category is around 340,000 homes, the supply in the category is only 44,000 homes only." Even in the price range of 50 lakh, there exists a big gap in demand and supply; while there is demand of about 480,000 units, the average supply is around 112,000 per year, according to the report.

While you would expect supply to increase with rising demand, it actually fell down, according to data from ANAROCK Property Consultants Pvt. Ltd, a real estate consultant. “Affordable housing saw a quarterly decline of total new supply—by a significant 20%—from 32,060 units in Q1 2019 to 25,580 units in Q2 2019," said a report by ANAROCK Property.

Why is supply low?

Developers are reluctant to take up affordable housing projects aggressively because of various reasons. Experts say that limited availability of affordable land parcels in urban areas makes it unviable for developers to take up such projects. “The prevailing high property prices within the municipal limits of major cities prevents builders from launching affordable housing projects there, while lack of basic infrastructure facilities in peripheral areas—where housing under 45 lakh could be developed—discourages buyers," said Anuj Puri, chairman, ANAROCK Property.

Developers also blame the time-consuming process of obtaining clearances and approvals. “It takes around a year to complete all the paperwork and commence construction after having entered into an agreement for land purchase," said Parveen Aggarwal, chairman, Signature Sattva, an affordable housing real estate developer.

Developers claim they need to take approvals from about 40 departments of central and state governments and municipal corporations to start a project. “Land cost is typically 30% of the project value, and spending a year on obtaining approvals escalates project cost by 3-5%. This is huge as profit margin in case of affordable housing is low, say, 8-10%," said Aggarwal.

What buyers look for

Buyers’ preferences remain the same for any type of property, including affordable. “While purchasing an affordable housing property, product quality ranked as the first key parameter, followed by brand name," stated the Knight Franck-RICS research. For 80% homebuyers, cost was the topmost consideration, followed by safety and security (71%). Besides, 52% homebuyers highlighted parking space as a major gap in terms of their requirements in their current residences; security, playground and availability of public transport accounted for 43% each. About half of the people surveyed said location was a factor that affected their decision to buy.

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