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Affordable housing is a Rs 6.25 trillion opportunity

Demand for affordable housing to remain healthy, supported by a growing population, young demographic profile, shift towards nuclear families and rapid urbanisation.

real estate Updated: Jan 17, 2017 16:07 IST
Demand for affordable housing  in the country is expected to remain healthy, supported by a growing population, young demographic profile, shift towards nuclear families and rapid urbanisation.
Demand for affordable housing in the country is expected to remain healthy, supported by a growing population, young demographic profile, shift towards nuclear families and rapid urbanisation.

The market potential of affordable housing projects in the country is expected to touch Rs 6.25 trillion by 2022 due to demand emanating from a growing population and the disparity that exists in household income and high real estate prices. This demand is likely to remain stable even during the period of downturn, says rating agency ICRA..

“The housing shortage is expected to increase from the current level of 19 million units to 25 million by 2021, based on a stable decadal growth rate. Assuming an average ticket size of Rs 25 lakh per unit, this translates into a market potential of Rs 6.25 trillion for affordable housing projects,” says K. Ravichandran, group head, corporate ratings, ICRA.

ICRA expects the demand for affordable housing to remain healthy, supported by a growing population, young demographic profile, shift towards nuclear families and rapid urbanisation. Given the wide disparity in household income in the country and the high real estate prices acting as a deterrent for buyers, a predominant share of this demand would be concentrated in the low cost and affordable housing segments.

While the demand for low cost and affordable housing segments has been healthy, the supply has been limited with these segments largely being catered to by the government undertakings or the smaller and unorganised developers. This, in turn, has resulted in an acute shortage of housing in the low cost and affordable housing segments, it says.

The government has provided various incentives to home buyers, targeted at the affordable housing segment, which is expected to further augment the demand. These include credit-linked subsidy for housing loans for the economically weaker section (EWS) and the low income group (LIG) under the Pradhan Mantri Awas Yojna (PMAY) and the additional income tax deduction for interest on home loans of up to Rs. 35 lakh. The recently announced interest subvention of 3% and 4% on home loans of up to Rs. 9 lakh and Rs. 12 lakh respectively, under the PMAY, would further reduce the net cost to the buyers.

In addition to the large untapped market, the affordable housing segment benefits from a stable demand scenario, driven by home buyers rather than investors. Moreover, the demand for affordable housing segment remains largely stable during the period of downturn as well.

While the long-term demand outlook for affordable housing remains healthy, the segment faces challenges largely intrinsic in nature.

“For affordable housing projects, the pricing and thus the ticket size of the units are the key defining characteristic. This in turn limits the headroom available to the developers for increasing the rates, resulting in thin profit margins. The profitability of affordable housing projects, thus, remains low when compared to the premium segment as well as the mid-segment offerings. However, the low initial capital requirement, coupled with the relatively shorter execution time period, helps in supporting the overall return on capital employed for these projects,” says Shubham Jain, vice president, ICRA.

The developer’s ability to execute the project within the budgeted cost and within time remains critical for maintaining healthy returns for affordable housing projects. With land being a vital raw material for real estate projects, the developers’ ability to acquire large tracts of land at low rates is the key for the viability for the project.

Notwithstanding favourable potential in affordable housing segment, ICRA’s outlook on the overall real estate sector remains negative for the short term given the weak consumer sentiment and the low affordability levels, which are expected to keep the residential real estate demand under pressure. The developers’ cash flows are expected to remain subdued given the slowdown in sales and lack of new launches. Moreover, the flexible payment schemes offered by developers, in a bid to boost sales, have further exacerbated the cash flow problems. The subdued cash flows have led to increased dependence on external sources of funding, as reflected by the rising debt levels.

The recent ban on high denomination currency is expected to pose a challenge to all stakeholders in the industry and result in further demand slowdown as well as price correction across various product segments, especially the premium to the luxury segment. However, over a long term, this move, along with the Real Estate Act is expected to be positive, bringing in a paradigm shift in the way business operations are conducted in the real estate sector. While residential real estate continues to remain subdued, there has been a gradual improvement in commercial real estate, with improved occupancy levels and stable rentals, supported by the limited fresh supply coupled with the resurgence of corporate sector demand, the agency adds.