The Future of Affordable Housing - Dec'13
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  • 1. The Future of Affordable Housing All rights reserved. This publication is protected by copyright. No part of it may be reproduced, stored in a retrieval system or transmitted, in any form or by any means, electronic mechanical, photocopying, recording or otherwise without the prior written permission of the publisher.
  • 2. The Future of Affordable Housing The past couple of years have witnessed significant project launches in the affordable housing segment in India. One of the major reasons is the global economic slowdown pulling back developers from high margin luxury segment to low margin affordable segment due to volume sales and lesser investment. On the demand front, rising disposable incomes and growing urbanization have further fuelled this growth. Micro financing has helped the developers and consumers avail easy finance without stringent KYC norms of banking entities. Government schemes too have supported the movement, especially for the EWS segment through interest subsidies, tax benefits, incentives to developers in the form of higher FSI, subsidized loans among others. Affordable Housing - RNCOS Definition Affordability is a relative term linked to one’s income, expenditure, commitments and savings. Different countries have varying definitions of affordable housing depending on their economic dynamics. In true sense, affordable house is one that provides adequate shelter and is in line with one’s budget. In India, various Government working groups and independent agencies have defined affordable housing on the basis of house-hold incomes and size of the homes. Affordable houses, as per RNCOS comprise houses for Economically Weaker Sections (EWS), Lower Income Groups (LIG) and Middle Income Groups (MIG). Category HH Income (P.A.) Size (Super Built Up Area) EWS < INR 1,50,000 Up to 300 Sq Ft LIG INR 1,50,000 3,00,000 300 - 600 Sq Ft MIG INR 3,00,000 10,00,000 600 - 1200 Sq Ft Source: RNCOS Basic Amenities EMI/Rent Sanitation, adequate water supply and power EMI does not exceed 3040% of gross monthly income of the buyer Provision of community spaces and amenities such as parks, schools and hospitals
  • 3. Urban Affordable Housing Shortage As per census 2011, there is huge shortage of houses for the lower most category i.e. EWS. But the real opportunity lies in the LIG housing where the finan- cial risk of buyer is not high and proper documentation is easily available. Housing Shortage (Million) Category Monthly Per Capita Estimated No. of Expenditure (INR) HHs (2007)* EWS 0-3,300 21.81 21.78 LIG 3,301-7,300 27.57 2.89 MIG 7,301-14,500 16.92 0.04 66.3 24.7 HIG 14,501 and above Total Source: Report of the Technical Group (11th Five Year Plan: 2007-12) on Estimation of Urban Housing Shortage *Distribution of 66.3 million households estimated from percentage of MPCE classes in NSS 60th Round (Jan-Jun 2004) NSS Report No. 505
  • 4. Breakup of Housing Shortage 11.70% 0.01% 0.15% EWS LIG MIG HIG 88.14% Source: Report of the Technical Group (11th Five Year Plan: 2007-12) on Estimation of Urban Housing Shortage The growth in housing construction is directly linked to the country’s macro economic performance. For every rupee invested in housing and construction, 78 paisa gets added to the GDP. Housing sector contributed 5% to India’s GDP in 2012 which is further expected to rise to 6% in 2013. The slowing pace of Indian economy along with steep depreciation in rupee against the US dollar has added to the woes. Projections state that the Indian economy is about to grow at a slow pace of 5-6% in next five years. Real estate is under pressure. HIG and luxury segment is losing focus. Financial constraints pull developers towards affordable segment (low margin, rapid sales) Real GDP Growth 6.7% 6.4% 5.8% The slowing pace of Indian economy along with steep depreciation in rupee against the US dollar has added to the woes. 6.1% 3.3% 2011 2012 2013e 2014f 2015f Source: Central Statistical Organization, EIU Note: e/f = EIU Estimation/Forecast
  • 5. Problems at Consumer Front Inadequate Savings • Majority income of LIG households spent on food, non-food and house rent expenses • Disposable surplus is highly sensitive to change in expenditure Lack of Financial Awareness • Low awareness about emergence of Micro Housing Finance Companies/Self Help Groups • Inadequate information about Government schemes meant for lower income housing Problems at Legislative Front Lengthy Approvals • Approvals from nearly 40 departments in central, state and local bodies • Nearly 2 - 3 years for approvals and even more leading to 25-30% cost escalation Unclear Laws and Guidelines • The building bylaws and rules for FSI, zoning and development plans lack clarity • Overlapping guidelines for real estate development • Random modifications in regulations hamper the entire project planning • Insufficient knowledge of financing options and rationale to judge the most viable option Ever-Rising Cost of Construction • Construction cost includes cost of cement, steel, sand and labor • Other costs comprise cost of land, registration, approval, developer’s margin etc. • Steep price rise in raw materials and labor (AAGR 2005-2012) Cement - 10% Steel - 20% Sand and brick - over 100%
  • 6. Initiatives to Spur Growth Amendment in Flagship Schemes Government has recently amended flagship scheme Rajiv Awas Yojna. Ministry has allocated INR 322 Billion for RAY during 12th Five Year Plan. Increased provision of INR 75,000 instead of the earlier limit of INR 50,000 per EWS/LIG dwelling unit is meant to boost the low income housing in the country. Similarly, Centre has also improvised the Interest Subsidy Scheme in favor of masses. As per the amended scheme, nearly 1 Million beneficiaries would be covered under ISS during 12th five year plan. INR 36 Billion is allocated for the implementation of ISS for Housing the Urban Poor (ISHUP), which is rechristened as the Rajiv Rinn Yojana (RRY). The Reserve Bank of India has relaxed the norms for external commercial borrowings or ECBs for Housing finance companies for the purpose of on-lending for low cost housing units. Ease of fund raising through external commercial borrowing route is a major step to propel the affordable housing sector. Builders can borrow cheaper funds from abroad, thereby leading to significant fall in the financing cost. As per the amendments, the total experience of developers going for ECB route has been lowered to 3 years, against 5 years. Unlike earlier, there is no need of minimum paid-up capital for HFCs to avail external borrowings. The aggregate limit for ECB has been extended for the FY 2013-14 and FY 2014-15 with a ceiling of US$ 1 Billion in each of the two years, subject to review thereafter. Single Window Clearance Fund Raising through ECB The major hurdle in low cost housing is the excessive duration of approvals and hassles in procuring numerous approval certifications and clearances. Industry stakeholders and major developer associations such as CREDAI have urged for streamlined approval processes to bring down the cost of houses. Of late, some regions have adopted the adored SINGLE WINDOW CLERANCE way which has lead to remarkable cost reduction and convenience. The state of Punjab has successfully followed the model with successful implementation. On the similar lines, Municipal Corporations of Delhi and Indore have introduced online sanction for building plans and issuing completion certificates. More such developments are expected to improve the housing sector performance in future.
  • 7. Looking for an in-depth study Our Proposition RNCOS is a leading Business Consultancy firm helping its clients to enter new geographies and in attaining growth by developing market strategies for them. GROWTH PARTNER We help you make informed decisions through the practical application of research, hand holding you to your success… Critical questions that businesses need to address: • • • • Where should you set up your business? Who should be your distributors? What is the current market structure & size? Who should be your customers? We understand your immediate needs and your long-term goals and objective and work with you on how to accomplish them. RNCOS blends the best of strategy consulting with the best of market research to provide organizations with accurate, succinct answers to their most important business questions. Our offerings Product Segments Market Insights • • • What is the market size Structure of the market Who are buyers • • Identification Competitive Assessment • Most suitable distributors and channels for your business. • Analyzing their strength, credibility. Similar products in the market Features, attributes & market share of these products • Customer preferences • Price range of these products • Financial & strategic analysis of existing competition • Acceptance level among customers
  • 8. For more information on how we can work with you Contact VARTIKA SEHGAL Sr. Research Specialist RNCOS E mail: vartika.sehgal@rncos.com Website: www.rncos.com Phone: +91 120 4224700 /01 / 02/ 03