The term affordable housing has become something of a buzzword in recent years and clearly the next big thing for the Indian real estate sector. Why is this so? Opinions differ on this with several experts claiming that the skyrocketing prices of real estate in most metro cities and even tier-II cities led to a glut in the market as far as buyers were concerned. This, clearly led to shifting customer preferences for low-priced and affordable projects in keeping with the economic aspects of the time. Some experts feel that this is natural with growing urbanization, increase in population in and around major cities of the country and of course, the entry of more first-time buyers and families into the realty market.
Key market trends worth noting
Whatever be the reason, affordable housing is clearly here to stay and with gusto! As of August 2018, multiple studies and reports noted that overall residential sales volumes have been boosted greatly by affordable housing due to growing interest of real estate developers in this segment and the sops offered by the Government. As per reports, one out of every five homes that are sold in the country were priced lower than Rs.25 lakh at this time in the affordable housing segment. This clearly indicates how much the segment had progressed by then and how far the market opportunity lay for developers to boost their businesses in this category.
Here’s looking at some other key trends that are worth noting in this regard:
- As of August 2018, reports noted that overall residential sales volumes for affordable homes went up from only 8% in 2015 to 21% at the time, almost a three-fold increase.
- Affordable housing was the segment with the most growth and highest number of new launches as of August 2018. Around three years earlier, real estate developers were majorly focusing on the premium segment for homes priced above Rs. 50 lakh on an average. However, at this time, there was more rationalization of the market with the major chunk of housing supply being deployed in the affordable housing category.
- Between Q1 2016 and Q1 2019, sales volumes were close to tripling in the affordable housing segment. The share of luxury properties in total real estate sales, i.e. those priced more than Rs. 2 crore, came down to only 5% from 14% previously. For the June 2018 quarter, 10,890 housing units were sold and all of these were priced lower than Rs. 25 lakh. This indicated year-on-year growth in sales volumes to the tune of 32%.
- Government incentives offered under the Pradhan Mantri Awas Yojana (PMAY) played a big role in attracting real estate developers and buyers alike for the affordable category. Under PMAY, households with annual incomes up to Rs.18 lakh can access a subsidy of roughly Rs.2.3 lakh upfront for buying their homes. There are subsidies for lower income slabs as well, starting from EWS and LIG categories to MIG1 and MIG2 which is the highest slab of Rs. 18 lakh annually.
- Buyers also receive tax deductions on their home loans which is another major draw for first-timers who seek big benefits, combining tax exemptions with interest subsidies offered by the Government.
- Developers have 100% deductions for profits made in affordable housing projects in case of apartments up to 30 sqm and 60 sqm for metro cities and other cities which have been completed in 3 years.
- GST and RERA have ushered in greater transparency and enhanced overall accountability of developers while boosting buyer confidence. Pent-up demand is now being released in the affordable category, leading to higher transactions with more supply available in the market now.
- Urbanization, population growth and entry of first-timers to continue generating affordable housing demand over both the short and long term according to experts.
- The overall contribution of affordable housing in the real estate market is expected to touch a whopping 40% over the next few years as forecasted by market experts and real estate developers alike.
How the Indian real estate market is faring
Here’s taking a look at the Indian real estate market and how it fared throughout 2018 with some key indicators for 2019 as well.
- As per several experts, demand for apartments went up by 7% last year to touch 2.15 lakh units in total. Some other reports state that sales volumes went up by 6% in 2018 while some stated that 47% housing sales growth was observed in the top 7 cities of the country. Other experts have indicated sales growth of 16% in the top 7 cities while some have highlighted the 9 major cities of the country which reportedly saw an increase of 25% in real estate sales volumes.
- All in all, Indian real estate has witnessed growth in 2018 with housing sales steadily reviving in most Indian cities.
- As per reports, Bangalore witnessed sales growth of 19% and 38,525 units were sold last year.
- Sales volumes increased by 40% in Chennai to touch 14,920 units as per several reports.
- In Mumbai, sales volumes increased by 9% to stand at 22,413 units.
- Sales transactions touched 49,706 units, indicating 16% of growth in Pune.
- For Kolkata, real estate sales figures touched 14,166 units, indicating growth of 14%.
Sales volumes came down by 16% in Gurgaon with 9,425 units being sold in 2018 while they were down by 5% for Noida at 3,828 units. They also came down in Hyderabad overall by 17% to stand at 15,486 units while transactions also declined by 2% in Thane to stand at 46,347 units according to several reports. However, these are all recovering markets.
The Delhi-NCR market is already witnessing the positives arising from the metro network expansion and other infrastructural development along with increased customer confidence in the housing market. On the other hand, Hyderabad was one of the most stable and fast- growing realty markets and the trend is set to continue, observing rapid growth in its peripheral areas and outskirts. Overall, new launches decreased by 22% in 2018 to stand at 1.46 lakh units in comparison to 1.87 lakh units that were launched in 2017. On the flipside, this played a role in lowering overall inventory to 6 lakh units, indicating a drop of 10%.
Interestingly, as estimated by experts, a whopping 40% of sales volumes in 2018 were derived from the affordable housing segment. Almost every major real estate player in India, irrespective of previous project categorization and overall market presence, ventured into the affordable housing category according to industry experts. This segment was previously bypassed by luxury real estate developers but with sales volumes increasing rapidly in this space, everybody now wants a piece of this lucrative pie. For 2019, affordable housing should keep driving growth with favourable policies, growing developer interest, more supply and the fading out of the initial impact of GST and RERA.
Affordable housing- Challenges ahead
While the circumstances are paved favourably for affordable housing to grow steadily, there are some challenges which have to be taken into account as well. Firstly, reports reveal that new launches in this market segment have gone up exponentially in recent times. Out of around 77,590 units sold in the top 7 Indian cities, as per reports, almost 25% have prices lower than Rs.10 lakh while the remainder have prices between Rs.20-40 lakh. This goes to show the burgeoning popularity of affordable housing by all means.
However, the challenge lies in the fact that a large majority of these projects are situated in peripheral zones of these major cities and sometimes hugely outside the city limits as well. The huge cost of land in key cities, particularly in metros, has led to real estate developers coming up with affordable housing projects in far-away suburbs and the outskirts. For instance, if you take a city like Mumbai into consideration which is the costliest housing market in the country and a city with huge scarcity of land, centrally located units are unaffordable for most buyers since huge land costs borne by realty players are naturally passed onto buyers.
Suppose redevelopment projects were taken into account for buildings which are in a dilapidated condition and very old within city limits, higher FSI could be a solution worth considering although the yield from redevelopment may be nominal. There should be clearer policies for redevelopment and property ownership with a stipulated component of affordable housing mandated for these projects.
Real estate developers often have to invest huge money and spend a lot of time for the acquisition of the redevelopment legal rights for buildings/projects located centrally within the city. They will obviously want to realize this investment from the project and hence they usually provide premium and ultra-luxury developments in central areas of major cities that have been redeveloped. The Government should be selling redevelopment rights with a compulsory regulation for the development of just affordable housing projects in key city areas. There need to be more policies encouraging developers to come up with mass housing projects and that too within city limits as opined by various experts.
Will the new Budget benefit affordable housing?
The new 2019-20 Union Budget is an interim one although the provisions already stipulated may well boost the affordable housing space in the following ways:
- The tax rebate threshold has been scaled up from Rs.2.5 lakh in annual income to Rs.5 lakh in annual income. This will put more money in the hands of the middle-class and will naturally help more first-time buyers invest in affordable housing units. This will be a major boost for the affordable housing space as estimated by experts and developers alike.
- The tax benefit period for developers developing affordable housing projects has been extended for another year till the month of March next year.
- The period of exemption in case of notional tax on rent for unsold inventory has been scaled up to two years from one year from the end of the year in which the real estate project has been completed. This will give a further incentive to real estate developers.
- Income tax exemption (notional rent) for a self-occupied second home will also drive higher real estate sales and bring in new buyers into the market. This will help drive up sales volumes in the mid-range category.
- The tax exemption on rent up to Rs.2.4 lakh is another good move for boosting residential real estate.
- The rollover of capital gains from investing in one residential property has been scaled up to two residential homes with gains up to Rs. 2 crore. This benefit will only be available once in a lifetime.
- The TDS threshold for tax deductions on rent has been scaled up to Rs. 2.40 lakh from Rs. 1.80 lakh earlier.
Other Positives
The real estate sector has been showing steady recovery signs overall. The entire market has synced itself to encourage affordable housing as recognized by the Government, industry, developers and consumers. The Government has already boosted the affordable housing space with the PMAY initiatives and subsidies, the mission of Housing for All by 2022 and awarding infrastructure status for the affordable housing sector previously. The renewed emphasis on affordable housing can be measured by reports which state that more than 1/3rd of new launches seen last year were in the price point below Rs. 50 lakh.
100% deductions on profits of real estate developers in tandem with a dedicated fund for affordable housing are other key measures for boosting this segment in India. Supply levels have gone up considerably in the space and should keep increasing over the next few years. In fact, several financial institutions are also taking the initiative to offer interest cuts on affordable housing loans which now constitute a major chunk of home loans disbursed by them.
State Bank of India, the country’s biggest lender, for instance, has lowered its interest rates for affordable housing loans up to Rs. 30 lakh to 8.7% as compared to 8.75% previously. SBI has already stated that affordable housing is a major driver for its home loan division and hence the cut in interest rates. Overall, affordable housing is the next big growth story for Indian real estate.
