The unfulfilled dream of budget housing in India

Along with P.S. Jayakumar, a former consumer banking head of Citibank, he founded VBHC Value Homes Private Ltd in July 2008. This firm, he had said, would build homes that cost less than ₹20 lakh—it would revolutionise the residential real estate market where big developers and costly projects ruled the roost.

The idea, expectedly, was met with scepticism. “How come nobody else has entered the space?" an interviewer asked Rao. Ever optimistic and outspoken, Rao shot back: “Why did nobody create a low-cost detergent before Nirma?"

Other developers soon followed Rao’s footsteps. Some managed to launch their projects even before VBHC did.

The timing seemed just right. The financial crisis of 2009-2010, following the collapse of Lehman Brothers, 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. Their capital dried up. ‘Affordable housing’ entered the government’s and the private sector’s lexicon.

More than a decade since, affordable housing continues to nest in the government’s scheme of things but is fast vaporizing from the private sphere.

Most private affordable housing firms such as VBHC couldn’t scale up; high material costs, delays and land costs became bottlenecks. Ultimately, they had to raise prices due to compounded inflation. While homes valued under ₹45 lakh in metropolitan cities or those with carpet area of 60 sq metres or below are called ‘affordable’ by the government, the private sector’s definition has shifted upwards. The low-cost housing dream has cracked.

Anarock Property Consultants, a real estate consultancy, still brackets affordable homes at sub- ₹40 lakh; mid-segment at ₹40–80 lakh; and premium at ₹80 lakh– ₹1.5 crore. Of the 2.37 lakh homes launched in the top seven cities of India in 2021, over 63% was in the mid and premium segments. The affordable supply share dropped to 26%. In 2019, before the pandemic, the supply share of affordable homes was as high as 40%.

In January-March 2022, the mid-segment again dominated new supply with 35% share. Premium and affordable segments generated 25% each, while the remaining pie was cornered by the luxury segment.

“The demand (for low-cost housing) is still high but the problem is the cost structure, particularly the time delay interest and lengthy project approvals. The margins become thinner. Financing is another issue. Home loans for premium projects are easier," Jerry Rao says.

Developers complain that today, it is easier to get faster approvals for ₹5 crore villas than ₹15 lakh homes.

The lure of the middle

Affordable housing players from a decade ago now have more edited dreams. And ‘mid-market’ is the word in vogue.

VBHC reduced its pan-India plans to focus only on Bengaluru and Mumbai metropolitan region. The company is also diversifying to take up redevelopment projects, plotted sales, and build affordable but aspirational products such as row houses. It currently builds homes in the ₹20-50 lakh price range.

“Affordable housing is a complicated market. The costs for mid-market and affordable are the same, which is why many developers have moved upwards," Rao explains. “It’s a struggle and we have to keep revisiting the business situation."

Soon after Tata Motors Ltd launched the small car Nano in 2009, touted as the world’s cheapest car, Tata Housing Development Co. Ltd launched ₹4-8 lakh homes under the Shubh Griha brand in Boisar, a distant suburb in Mumbai. The project was a runaway hit.

Tata Realty and Infrastructure Ltd (TRIL), which now houses all the residential and commercial projects of the Tata group, has over time changed track to focus on premium and what it calls ‘aspirational, affordable homes’ under its New Haven brand. They are priced at ₹40 lakh or more. “The focus is to do premium and luxury housing projects with upgraded lifestyle post the pandemic. We have a large commercial office portfolio too," says TRIL’s chief executive officer (CEO) and managing director (MD) Sanjay Dutt.

Dutt adds that a budget housing project needs cheap land (less than ₹500 per sq ft FSI or floor space index) and construction cost not over ₹1,500 per sq ft. Along with the cost of capital and costs due to extended project timelines, expenses can shoot up substantially. “The biggest competition for affordable homes is mid-segment homes because the cost dynamics make sense," he says.

Developers say profitability in affordable housing is almost half of what they get from the mid-market segment and one-third compared to luxury housing. Rising input costs post the pandemic have now dealt a further blow to affordable housing.

“Demand remains for affordable but higher input and construction costs are pushing up prices. We will continue to do affordable but the focus will be more on mid-market," said M. Murali, chairman and MD, Shriram Properties Ltd, known for its affordable homes below ₹50 lakh.

In its budget housing project in Attibele, Bengaluru, where homes were earlier sold at ₹30-32 lakh, the second phase will see prices rise by nearly 20% with units costing ₹40-42 lakh.

Sharad Mittal, CEO of Motilal Oswal Real Estate, which manages real estate funds, said from a risk-reward point of view, mid-income housing looks more attractive, and incurs better sales velocity and margins.

“Homes below ₹4,000 per sq ft is the low-cost segment, which has a social housing angle that needs a different mindset though the demand is huge," he says. “Buyers also face challenges with getting mortgages. We mainly finance projects with homes in the ₹4,000-7,000 sq ft range, and selectively below ₹4,000 per sq ft. Developers today are picking projects that assure better returns," Mittal said.

In a tough real estate market, large developers were eager to expand their customer base and cater to homebuyers across price segments by lowering their entry prices. However, when the market is on an upwards swing, developers want to leverage the demand and market projects with superior margins.

Meanwhile, the pandemic may have shifted buying patterns too—those who can afford the costs appear to be preferring bigger spaces. Shriram Properties is seeing an uptick in its mid-market portfolio, priced between ₹50 lakh and ₹1 crore. Its portfolio includes both apartments and plots.

High volumes bet

While many private developers have switched off from the affordable housing dream, a handful still see a business case. The demand for budget homes continues to remain strong. Developers, nevertheless, need to work hard at the supply-chain to get a handle on costs and margins.

Mahindra Lifespace Developers Ltd, that sells value homes under the Mahindra Happinest brand, launched three projects during the pandemic. Demand stayed strong even though the firm has raised prices in its second project in Kalyan, a far suburb in Mumbai, to offset inflationary costs. One-bedroom homes are sold at over ₹35 lakh and two-bedroom houses for above ₹55 lakh.

“The sub- ₹50 lakh segment in the metros is under-served by organized or corporate developers. Many dipped their toes and then retreated to a higher segment. We see that as an opportunity. For a brand like Mahindra, the demand is intact. It’s a challenge to do affordable housing in India, but we are committed to it," says Arvind Subramanian, MD and CEO, Mahindra Lifespace. “We will buy land where can get in and get out of the project in four years. Happinest has high volume launches. We sell almost everything at launch. Cash flows are used to complete projects, and the turnaround is faster," he adds.

Delhi-based Signature Global is another company sticking to the affordable segment. It aims to launch 10 projects in 2022-23, targeting around ₹3,500 crore of pre-sales. Last year, the company made about ₹2,500 crore in pre-sales.

“We don’t compromise on quality. Profit margins may be relatively less (in budget homes), but we can get a margin of 15% on high volumes, which other developers have found difficult," says Pradeep Aggarwal, founder and chairman, Signature Global.

Ram Walase, MD and CEO, VBHC, says that sales momentum have been steady post pandemic, at 70-80 units a month, at par with pre-covid levels. The company held land in Oragadam (near Chennai) and Neemrana (in Rajasthan). Here, it has launched plots and sold well. Affordable row houses, redevelopment projects in Mumbai and Thane and group housing projects in Panvel, Navi Mumbai, and Bengaluru are next in line.

“Input costs have gone up. However, currently, we can’t take price increase to customers. The sweet spot for sales is ₹4,000-5,000 per sq ft. Anything less is a challenge. We want to build homes closer to cities but along transport corridors like the metro," Walase adds.

The PMAY factor

So, what’s going on with the government’s affordable housing push?

India’s ‘housing for all’ mission was announced in 2015 with an initial target to provide shelter to every Indian by 2022-end. Pradhan Mantri Awas Yojana (PMAY) is the flagship scheme, targeting both urban and rural areas.

Houses under PMAY-urban measure 60 sq metres in metros and 90 sq metres in non-metros. For the economically weaker section, the home size is capped at 30 sq metres, with some scope for flexibility.

The ministry of housing and urban affairs has sanctioned 1.22 crore houses for PMAY-urban. As of 31 March 2022, 97.02 lakh such houses have been ‘grounded’. Of this, only 56.35 lakh have been completed thus far. ‘Grounded’ refers to instances where construction has started and includes the number of completed houses as well. For rural areas, 2.29 crore houses have been sanctioned while 1.77 crore have been completed.

Over the past seven years, the government rolled out several incentives and regulatory measures to support this affordable housing push. These include reduction of the Goods and Services Tax (GST) on affordable housing and accordance of infrastructure status to enable cheaper loans through priority sector lending.

However, some of the demand boosting incentives—such as income tax exemptions and subsidy on home loans for middle and lower-income groups—ended in 2021-22.

In this year’s budget, the government chose not to extend these incentives for home buyers. Instead, it announced allocation of ₹48,000 crore for PMAY with an aim to complete 80 lakh houses in 2022-23.

“Last year, we were sceptical whether targets will be met and funding required will be available. Though the target will not be met in 2022, the funding gap has been bridged by 50% in the budget. (The number of ) completed units are going up and things are progressing well," says Kapil Banga, assistant vice-president and sector head of ICRA Ltd., a credit rating agency.

The policy emphasis appears to be shifting towards long-standing issues—like the ease of doing business—which directly impacts timely delivery. That’s an encouraging sign.

“The central government will work with the state governments for reduction of time required for all land and construction related approvals, for promoting affordable housing for middle class and economically weaker sections in urban areas," finance minister Nirmala Sitharaman said in her budget speech on 1 February. “We shall also work with the financial sector regulators to expand access to capital along with reduction in cost of intermediation," she added.