Low-cost housing segment has made affording a house simpler now
Several developers which focused on luxury housing earlier faced competition due
to the entry of new players. So, many shifted focus to affordable homes
to create demand and diversify risk.
Water, Water, everywhere, Not a drop to drink.
Those with limited disposable incomes will be able to relate to sailors on a ship stranded in sea. Like the mariner in The Rime of the Ancient Mariner, a poem by Samuel Taylor Coleridge (1772-1834), home buyers stand amid thousands of homes, most of them beyond their budget.
In India's urban real estate market, there is a huge stock of apartments, condominiums and villas. Most have prohibitive price tags as developers focus on building premium houses to earn better margins. However, after the economic slowdown of 2008-09, things have been improving on the affordable housing front.
HUGE DEMAND
During the slowdown, there was a sharp fall in demand for luxury houses. Also, several developers which focused on luxury housing faced competition due to the entry of new players. So, many shifted focus to affordable homes to create demand and diversify risk.
There is a huge gap between demand and supply of low-cost homes. By the end of 2012, the total housing shortage in Indian cities is estimated at 26.53 million units, more than three-fourth of which will be of low-income households.
"The demand in the economically weaker section (households earning up to Rs 5,000 a month) is 26 million units, whereas the shortage in the low-income group (households earning Rs 5,000-7,500 a month) is three million," says Jaithirth Rao, chairman, Value & Budget Housing Corporation (VBHC), a developer with headquarters in Bangalore.
Several developers such as Tata Housing, Mahindra Lifespaces, Patel Realty and VBHC are active in the segment. Smart Value Homes, a subsidiary of Tata Housing, is developing low-cost houses in Boisar, Maharashtra (valued at Rs 4-10 lakh), Vasind, Maharashtra (Rs 18-28 lakh) and Ahmedabad. It plans to expand across the country in the next two-three years. VBHC has several projects where the starting price is Rs 8 lakh.
LEAPFROGGING
With rapid urbanisation and rising population, land is becoming more and more scarce in urban India. Poor regulations have aggravated the problem. For instance, government entities own large tracts of land in central locations that are being used inefficiently.
According to a Jones Lang LaSalle India (JLL, a property consultancy) report, land prices are much higher than levels that can support mass development. Too many controls over construction in central locations and restrictions on land recycling have forced cities to grow on the periphery.
Realtors, as a result, are forced to develop low-cost projects at 'leapfrogged locations' where land prices are lower. Leapfrogging refers to development in far-flung locations before closer locations are developed. Such locations often lack good infrastructure.
In Mumbai and the Delhi-National Capital Region, affordable housing projects are 65-75 km from the city centre. In Bangalore, Pune and Chennai, such houses are 25-30 km from the city centre. In Ahmedabad and Kolkata, however, the distance is 15-20 km.
Despite cheap land, some developers offer premium properties at these locations. "In peripheral areas, the cost of developing infrastructure is huge as the local authorities do not extend any support. After incurring such huge expenses, providing low-budget houses is not viable Hence, they come up with 'second home villas', a lifestyle product sold at a premium," says Subhankar Mitra, head, strategic consulting (West), JLL India.
BEING CONSTRUCTIVE
When land is available at low rates, construction accounts for 50-60 per cent cost. In premium housing, land comprises as much as 80 per cent cost.
For instance, if land is bought at Rs 150-250 per square foot, a home with basic amenities can be built at a cost of Rs 800-1,000 per square foot.
"Total cost control and fast completion of projects is critical to keeping costs down. A developer should be able to complete construction in 18-24 months. If the construction time is extended, input costs go up significantly," says Praveen Malkani, managing director, Patel Realty, a Mumbai-based developer with several no-frill affordable housing projects.
"In markets such as Mumbai, where land prices are high, the size of the apartment has to be squeezed to make it affordable," says Malkani.
Developers also adopt latest technologies to cut cost and time. Low-cost technologies and raw materials such as reinforced concrete blocks, pre-cast hollow blocks, pre-cast lintels, floor tiles, pre-fabricated panels and polymer panels for doors and windows can reduce the construction cost by 20-30 per cent.
BUMP AHEAD
Though developers are building more low-cost homes, the segment continues to face challenges.
"On the supply side, there are issues such as lack of availability of land in urban areas, rising cost of construction and regulatory roadblocks. On the demand side, lack of access to home finance impacts the ability of low-income groups to buy houses in the organised sector," says Brotin Banerjee, managing director and chief executive officer, Tata Housing Development Company, which has several affordable housing projects to its credit.
Builders say getting approvals and licences, which number 30-40, is a big problem.
"Long lead time for approvals is primarily because the government has added new authorities without removing the earlier ones. For instance, before Independence, the Collector's approval was required. Now, we have to get approval from town-planning authorities as well. In periurban areas, we also need the panchayat's (village council's) approval, although it does not have the technical expertise for that. We understand that it is more for levying a fee, in which case there should be a neatly sketched-out fee-filling exercise to avoid wastage of time," says Banerjee.
There's another problem. Projects can be built only on nonagriculture land. So, builders have to apply for changing the land use when they choose a far-flung plot marked as agriculture land.
"The process for conversion from agricultural to non-agricultural land is a problem. There is a plethora of no-objection certificates required. This takes a lot of effort and time," says Banerjee.
Some developers have been able to adapt their processes according to the multi-licence environment. "A lot of developers complain about delays in clearances. Most developers start a project and apply for licences and clearances later. Ideally, before you start a project, you should have all the clearances in place," says Malkani of Patel Realty.
Builders are also constrained by limitations such as the size of residential units. "In most parts of the country, the first bedroom of a housing unit has to be at least 120 sq ft. In Singapore, a bedroom can measure 90 sq ft," says Malkani. "A small bedroom may work for the end-user but is not allowed under regulations," he adds.
The floor space index (FSI, or the proportion of total built-up area to the plot size) restrictions are also a hindrance. Most places have an FSI of 1-4. In contrast, Hyderabad does not have any FSI restriction, which is cited as a reason for moderate house prices there.
REGULATORY PUSH
Though developers have their complaints, the government is trying to encourage affordable housing. Several central policies and subsidy schemes are targeted at low-cost housing. In Andhra Pradesh, projects beyond a certain size must have houses for low-income groups. Affordable housing projects also get concessions in the state. Maharashtra has relaxed FSI norms for dilapidated buildings (2.5 FSI) as well as rental housing (4 FSI).
Developers are not content with the government's efforts. "For effective implementation of low-cost housing projects, it is imperative that the government ensures availability of land at subsidised rates, fast approvals, property tax relief, funding support, additional FSI, connectivity to suburbs and creation of special residential zones," says Banerjee of Tata Housing. "For buyers, a combination of low-cost and easy credit, especially for those who are still not part of formal banking channels, is the first step for the success of affordable and low-cost housing initiatives," he adds.
Those with limited disposable incomes will be able to relate to sailors on a ship stranded in sea. Like the mariner in The Rime of the Ancient Mariner, a poem by Samuel Taylor Coleridge (1772-1834), home buyers stand amid thousands of homes, most of them beyond their budget.
In India's urban real estate market, there is a huge stock of apartments, condominiums and villas. Most have prohibitive price tags as developers focus on building premium houses to earn better margins. However, after the economic slowdown of 2008-09, things have been improving on the affordable housing front.
HUGE DEMAND
During the slowdown, there was a sharp fall in demand for luxury houses. Also, several developers which focused on luxury housing faced competition due to the entry of new players. So, many shifted focus to affordable homes to create demand and diversify risk.
IN PERIPHERAL AREAS, THE COST OF DEVELOPING INFRASTRUCTURE (ROADS, SEWERS, ETC) IS HUGE AS THE LOCAL AUTHORITIES DO NOT EXTEND ANY SUPPORT.
Subhankar Mitra
Head, Strategic Consulting (West), JLL India
"The demand in the economically weaker section (households earning up to Rs 5,000 a month) is 26 million units, whereas the shortage in the low-income group (households earning Rs 5,000-7,500 a month) is three million," says Jaithirth Rao, chairman, Value & Budget Housing Corporation (VBHC), a developer with headquarters in Bangalore.
Several developers such as Tata Housing, Mahindra Lifespaces, Patel Realty and VBHC are active in the segment. Smart Value Homes, a subsidiary of Tata Housing, is developing low-cost houses in Boisar, Maharashtra (valued at Rs 4-10 lakh), Vasind, Maharashtra (Rs 18-28 lakh) and Ahmedabad. It plans to expand across the country in the next two-three years. VBHC has several projects where the starting price is Rs 8 lakh.
LEAPFROGGING
With rapid urbanisation and rising population, land is becoming more and more scarce in urban India. Poor regulations have aggravated the problem. For instance, government entities own large tracts of land in central locations that are being used inefficiently.
According to a Jones Lang LaSalle India (JLL, a property consultancy) report, land prices are much higher than levels that can support mass development. Too many controls over construction in central locations and restrictions on land recycling have forced cities to grow on the periphery.
IN URBAN MARKETS SUCH AS MUMBAI, WHERE LAND PRICES ARE HIGH, THE SIZE OF THE APARTMENT HAS TO BE SQUEEZED TO MAKE IT AFFORDABLE.
Praveen Malkani
Managing Director, Patel Realty
In Mumbai and the Delhi-National Capital Region, affordable housing projects are 65-75 km from the city centre. In Bangalore, Pune and Chennai, such houses are 25-30 km from the city centre. In Ahmedabad and Kolkata, however, the distance is 15-20 km.
Despite cheap land, some developers offer premium properties at these locations. "In peripheral areas, the cost of developing infrastructure is huge as the local authorities do not extend any support. After incurring such huge expenses, providing low-budget houses is not viable Hence, they come up with 'second home villas', a lifestyle product sold at a premium," says Subhankar Mitra, head, strategic consulting (West), JLL India.
BEING CONSTRUCTIVE
When land is available at low rates, construction accounts for 50-60 per cent cost. In premium housing, land comprises as much as 80 per cent cost.
For instance, if land is bought at Rs 150-250 per square foot, a home with basic amenities can be built at a cost of Rs 800-1,000 per square foot.
"Total cost control and fast completion of projects is critical to keeping costs down. A developer should be able to complete construction in 18-24 months. If the construction time is extended, input costs go up significantly," says Praveen Malkani, managing director, Patel Realty, a Mumbai-based developer with several no-frill affordable housing projects.
"In markets such as Mumbai, where land prices are high, the size of the apartment has to be squeezed to make it affordable," says Malkani.
Developers also adopt latest technologies to cut cost and time. Low-cost technologies and raw materials such as reinforced concrete blocks, pre-cast hollow blocks, pre-cast lintels, floor tiles, pre-fabricated panels and polymer panels for doors and windows can reduce the construction cost by 20-30 per cent.
BUMP AHEAD
Though developers are building more low-cost homes, the segment continues to face challenges.
"On the supply side, there are issues such as lack of availability of land in urban areas, rising cost of construction and regulatory roadblocks. On the demand side, lack of access to home finance impacts the ability of low-income groups to buy houses in the organised sector," says Brotin Banerjee, managing director and chief executive officer, Tata Housing Development Company, which has several affordable housing projects to its credit.
Builders say getting approvals and licences, which number 30-40, is a big problem.
"Long lead time for approvals is primarily because the government has added new authorities without removing the earlier ones. For instance, before Independence, the Collector's approval was required. Now, we have to get approval from town-planning authorities as well. In periurban areas, we also need the panchayat's (village council's) approval, although it does not have the technical expertise for that. We understand that it is more for levying a fee, in which case there should be a neatly sketched-out fee-filling exercise to avoid wastage of time," says Banerjee.
There's another problem. Projects can be built only on nonagriculture land. So, builders have to apply for changing the land use when they choose a far-flung plot marked as agriculture land.
"The process for conversion from agricultural to non-agricultural land is a problem. There is a plethora of no-objection certificates required. This takes a lot of effort and time," says Banerjee.
ON THE DEMAND SIDE, LACK OF ACCESS TO HOME FINANCE IMPACTS THE ABILITY OF LOW-INCOME GROUPS TO BUY HOUSES IN THE ORGANISED SECTOR.
Brotin Banerjee
MD & CEO, Tata Housing
Builders are also constrained by limitations such as the size of residential units. "In most parts of the country, the first bedroom of a housing unit has to be at least 120 sq ft. In Singapore, a bedroom can measure 90 sq ft," says Malkani. "A small bedroom may work for the end-user but is not allowed under regulations," he adds.
The floor space index (FSI, or the proportion of total built-up area to the plot size) restrictions are also a hindrance. Most places have an FSI of 1-4. In contrast, Hyderabad does not have any FSI restriction, which is cited as a reason for moderate house prices there.
REGULATORY PUSH
Though developers have their complaints, the government is trying to encourage affordable housing. Several central policies and subsidy schemes are targeted at low-cost housing. In Andhra Pradesh, projects beyond a certain size must have houses for low-income groups. Affordable housing projects also get concessions in the state. Maharashtra has relaxed FSI norms for dilapidated buildings (2.5 FSI) as well as rental housing (4 FSI).
Developers are not content with the government's efforts. "For effective implementation of low-cost housing projects, it is imperative that the government ensures availability of land at subsidised rates, fast approvals, property tax relief, funding support, additional FSI, connectivity to suburbs and creation of special residential zones," says Banerjee of Tata Housing. "For buyers, a combination of low-cost and easy credit, especially for those who are still not part of formal banking channels, is the first step for the success of affordable and low-cost housing initiatives," he adds.
