The pot of gold lies at the bottom of the pyramid!!

Our country experienced an upswing in realizing the potential needs and demands for a variety of necessities of bottom-of-the-pyramid customers post 2008-09 crises. From microfinance to micro-insurance; the latest to replicate the trend is providing ‘aam aadmi makan’ (low income home). An article titled “A Market Solution to Affordable housing” in ‘The Mint’ on 21 January 2013 speaks about a 35-year old Bangalore based senior financial analyst who discovered this utopia - for under INR 15lakhs. The 2-bedroom pad located outskirts of main city is well constructed; the major attraction being its cost- INR 11lakh!!!

I’d like to talk about the major challenges in development of affordable/ low cost housing in India and initiatives by Government and private players alike.

Demand side drivers

• Rise in Urban Population: As per 2011 Census the population of India has grown 17.64% (in absolute terms) over the past decade. As per data compiled by the Ministry of Housing and Urban Poverty Alleviation (MHUPA) the urban housing shortage for Economically Weaker sections (EWS) of the society (whose monthly per capita expenditure being INR0-INR3000) has been 21.78million for 21.81million households- a shortfall of 99.99%.

• Rich Demographic Dividend
• The International Labour Organization has predicted that by 2020 India will have 116 million workers in the age bracket of 20-24 years as compared to China’s 94 million.
• The average age of an Indian citizen is expected to be 29 years in 2020 as against USA-40 years, Europe-47 years and Japan-46 years-what matters in the long run is age and not the size of population.
• Age Dependency ratio: the ratio of dependents-people younger than 15 or older than 64 to working age for India has been continuously decreasing.
  
• Land parcel shortages: The lack of land parcels within the city (metros) limits has pushed developers to seek land outside the cities (outskirts of cities) where land parcels are cheaper & thus making construction of low income housing viable. Mumbai and NCR have low income housing projects located 65-75 km away from the city centre whereas, Ahmedabad and Kolkata, provide better proximity, with projects located at a distance of 15-20 km from the city area. Bangalore, Pune and Chennai also have projects at a distance of 25-30 km from the main city.

Supply side drivers:

• Government intiatives
• Keeping in view the need for affordable housing, the Union Budget 2013 proposes to introduce a new section 80EE in the Income tax Act 1961 relating to deduction in interest up to INR 1lakh on loan taken by an individual from financial institution, provided, the loan amount should not exceed INR 25lakhs, the price of property should not exceed INR 40lakhs, the assessee should not own any residential property on date of sanction of loans and the loan should be sanctioned during FY2013-14. This section proposes to benefit the first home buyers by providing a deduction of interest from total income.
• The existing provisions allow External Commercial Borrowings (ECBs) for low cost housing has been allowed to ensure lower cost of borrowing for this segment.
• National Urban Housing and Habitat Policy (NUHHP), 2007 has identified ‘Affordable Homes for All’ as a key focus area to address the growth of slums, land shortage, housing shortfall and congested transit which in turn impacts property prices and basic amenities like water, power and open spaces in metros. The policy seeks to forge public-private partnerships to attain affordable housing objectives.
• Jawaharlal Nehru National Urban Renewal Mission (JNNURM) which was launched in December 2005 encouraged urban reforms in India. For the housing sector the main aim was to construct 1.5million homes for urban poor during 2005-2012 in 65 cities.
• Interest Subsidy scheme for Urban Poor (ISHUP) which was introduced by Central Government as 1% interest subvention scheme.  As per the scheme if an HFC (Housing Finance Company) disburses a loan to urban poor then 1% interest subsidy by the government will be credited in the HFC’s account which in turn will have to be passed on to the respective customer.
• Housing Finance Companies (HFCs): The emergence of various HFCs in the segment have ensured availability of formal financing options thus dissuading urban poor from going to private money lenders or loan sharks and pay interest up to 3-4% per month.

Opportunities-What’s in the store for builders and investors alike?

• On comparing the low income housing with a luxury housing one does observe that IRRs are significantly higher due to-ability to turnaround and project execution is relatively faster than luxury segment.
• With the estimated market size of INR 10,000billion there is an inherent demand as far as low income housing segment is concerned as the 90% of India’s total population (approximately 1billion) earns less than INR 24000 p.m.
• From a builders perspective the project will be bigger because one has smaller units and hence the number of units will be bigger thus lowering construction costs as a result IRR would be better.

Challenges in the segment: Some of the challenges are common across as a real estate industry and some of them being very specific to this segment, are listed as -

• Government rules are weighted towards the rich. It’s easier to build farmhouse on a two-acre plot than to construct 100 affordable homes on the same plot because of approvals. There are approx 56 departments from whom approvals are required. Construction delays due to lack of approvals results in higher costs, lower margins or self-defeating price escalation.
• Currently, FDI norms are such that smaller projects are not viable for FDI.
• The Government has to build additional infrastructure for people to commute as such houses will not be in the city centre but will be located outside the city limits.

Despite the challenges and low income housing being at its primitive stage there is an air of optimism about the sector’s growth emphasizing the segment to be one of a kind where units are funded by private sector companies and built by private sector companies. Emergence of nuclear families, rise in urban population, rich demographic dividends (aspiring youth of India) has given rise to several townships and the ‘aam aadmi’s makan’ segment is expected to grow significantly in future.