Why affordable housing may become a challenge for developers despite the government push

Prime Minister Narendra Modi approved government assistance for the construction of three crore rural and urban houses under Pradhan Mantri Awas Yojana (PMAY) during the maiden Cabinet meeting of his third term last week. However, affordable housing in urban and metro cities has taken a back seat recently, with a shift in focus towards the luxury and premium segments.

 

The move under PMAY is expected to boost the supply of much-needed affordable housing and is expected to have a significant multiplier effect on the economy given the realty sector’s linkages with ancillary industries. Real estate is the second largest employer in the country.

 

Families with an annual income of up to Rs 18 lakh are eligible for PMAY scheme and individuals must not own a permanent house in any part of India. The scheme provides financial assistance to eligible beneficiaries for the construction or improvement of their houses.

 

The implementation of PMAY in urban areas has induced a remarkable investment in the housing sector especially in the affordable housing segment. While the real estate industry and developers have lauded the government's initiative to unlock the affordable housing segment, they also recognize the challenges of reviving this segment in rapidly growing metro areas due to headwinds.

 

The affordable housing segment may drive economic growth, infrastructure development, and employment opportunities across various industries. However, the financial feasibility of such projects remains a critical concern for industry participants.

 

Manoj Gaur, President of the Confederation of Real Estate Developers Associations of India (CREDAI) NCR, noted a significant rise in preference for larger homes in gated apartment projects over the last few years.  "Shrinking land banks in established neighborhoods and rising input prices have increased construction costs. This has created a pricing threshold below which real estate developers cannot profitably price their projects, leading to a shift away from affordable housing in metro cities towards premium and luxury properties," Gaur explained.

 

Market participants highlight the demand-driven shift towards the luxury and premium segments. The rising affluent class aspires to a better lifestyle and views better housing as a status symbol. Conversely, developers find the economics of affordable housing less profitable in metro or urban areas.

 

Aman Gupta, director of RPS Group, stated that premium and luxury segment properties yield higher margins and substantial returns on investment for developers. "Only a few locations with good infrastructure, such as a robust road network and other facilities, are available for development," he added.

 

Developers often target mid-to-high-end users and investors, positioning their products as high-class or luxury. According to Gupta, there is less risk and a higher average ticket size in the luxury residential segment compared to affordable housing, which involves higher volumes and lower purchasing power parity (PPP), making it riskier.

 

Gunjan Goel, Director at Goel Ganga Developments, emphasized that developers aim to position their brand as a luxury product to attract wealthy individuals and investors. "The luxury segment is seen as safer due to the larger ticket sizes and fewer projects compared to the affordable housing segment, which involves many projects with lower returns per unit, making them vulnerable to risk perceptions," she said.

 

Market participants believe that for the government to effectively promote affordable housing in metro and urban areas, project costs must be reduced to make them more attractive to developers and homebuyers. They seek economic relief, incentives for homebuyers, and government interventions to lower costs.

 

Beneficiaries of PMAY can receive an interest subsidy of up to 6.5 per cent on the loan amount for the construction of a new house, while for the improvement of an existing house, they can receive an interest subsidy of up to 3 per cent on the loan amount.

 

Through its various categories, the scheme targets urban economically weaker section (EWS) and lower income group (LIG) households; rural areas and targets households living in kutcha houses; and select the middle-income group (MIG) households.

 

The EWS and LIG categories get a interest subsidy of 6.5 per cent per annum with a maximum loan subsidy up to Rs 6 lakh. MIG-I and MIG-II categories can avail for a interest subsidy of 4 per cent and 3 per cent per annum with a maximum loan subsidy up to Rs 9 lakh and 12 lakh, respectively.

 

Affordable housing is in high demand in both tier-I and tier-II cities. Developers argue that land and other costs must be made reasonable for these projects. They also suggest that the government consider GST relief for affordable housing projects and extend the interest subvention scheme, which is set to expire at the end of 2024.

 

Gaur from CREDAI suggested increasing the carpet area to 90 sqm in metro cities and 120 sqm in non-metro cities without any price cap to boost affordable housing projects.

 

Gupta from RPS recommended technological modernization through streamlined clearances and measures that minimize time and cost delays in the approval process. "The urban interest subvention scheme is a driving force that may encourage developers to take on more reasonable risks in affordable housing initiatives," he added.

 

The analyst from Goel Ganga Developments proposed using purchase incentives to stimulate demand among buyers of affordable housing units. "The government can support affordable housing by easing fund availability from financial institutions with lenient lending standards, aiding both developers and buyers," she added.