High land prices, taxes make affordable homes ‘castles in the air’

High land prices, construction costs and escalating taxes have made it difficult for developers to build affordable homes, raising questions over the success of the government’s ‘Housing for All by 2022’ mission.

In the past decade, cost of construction and compliance as well as land prices have shot through the roof. According to realty researcher Liases Foras, land prices have increased nine-fold in the past 12 years, making affordable housing a dream, especially in metros.

“The cost of approvals too is higher in metros, where the working population is scrambling for homes. But high prices in city centres are pushing developers to the periphery, where there is no demand for affordable housing due to lack of jobs,” Liases Foras MD Pankaj Kapoor told BusinessLine .

The government considers homes upto 30 sq metre (333 sq ft) in the four metros for the economically weaker section (EWS, defined as those with an annual household income up to ₹3 lakh) and lower income group (LIG, those with an annual household income of ₹3-6 lakh) affordable. Outside these prime locations, homes upto 60 sq m (646 sq ft) of carpet area come under the affordable category. And the EMI for these homes should not be more than 40 per cent of the household income.

However, developers believe it is almost impossible to construct affordable homes with a price tag that can matches EWS or LIG families’ paying capacity. Recently in Delhi, over a thousand home buyers under the EWS scheme returned houses to the government as the plaster was chipping off, taps were not working and the buildings looked dilapidated.

“The economics of building homes at low prices does not support homes that meet aspirational needs,” says Niranjan Hiranandani, National President for NAREDCO – the apex body for real estate industry in India. “Quality of construction is non-negotiable.”

Moreover, he adds, “the concept of a ‘dream home’ has been romanticised to the extent that a EWS buyer wants something that is a notch above. But the agencies implementing these schemes say the tight budget does not allow for additional expenses.”

Urbanisation is also increasing rapidly due to better employment opportunities in the metros and big cities. The result is a shortage of 19 million houses, with 99 per cent in the economically weaker and lower income groups.

In Mumbai, the Slum Rehabilitation Authority (SRA) scheme flats are almost unlivable. Nandan Mungekar, architect and town planner based in Mumbai, says, “SRA scheme flats are like pigeon holes, with no ventilation or natural lighting. They are vertical slums, with buildings just 10 feet away from each other.”

These cramped houses lead to the spread of tuberculosis bacteria, according to a recent study by Doctors For You (DFU), a non-profit organisation. The study was conducted in three colonies in M East Ward, which reported highest incidence of TB among Mumbai’s 24 wards.

Mungekar says that instead of SRAs, the focus should be on creating employment opportunities and education and health infrastructure in rural areas so that there is no incentive for people to migrate to urban areas. “The metros are bearing the brunt of this migration, making housing for all a big challenge,” he adds.

 

 

Numbers don’t stack up

“We have just started looking at this (affordable) segment. We don’t want to operate on a price point basis (of under ₹4,000 per sq ft). We have not able to figure out a model to make money below a price cut. Size cut is more relevant, and we are looking at launching new projects in that segment,” Mohit Malhotra, MD and CEO of Godrej Properties, said at a CBRE-CII conference in Mumbai. Sharad Mittal, director and CEO, Real Estate Fund, Motilal Oswal Real Estate, said: “It would be good to link affordability to size, not price: below ₹4,000 per sq ft, the margins just don’t stack up.”

Kapoor points out that construction cost per sq ft has gone up from ₹1,000 in 2005 to ₹1,800 in 2017, while approval cost is up from ₹216 to a whopping ₹1,655. Over this period, even finance cost has increased almost seven times, leaving little profit margin for builders ( see table ).

“The economics of constructing a house reflects aspects like the cost of land, construction material and labour. And it is a challenge to create a home that meets the aspirations of home seekers and also fits within their budget,” Hiranandani says.

Raj Vir Singh, a Gurugram-based town planner, says that since the cost of construction has gone up and land values are high, it is beyond the reach of the common man to purchase flats from government agencies. “Instead, the government should give plots of land of between 50 and 100 sq m with minimum facilities and let them construct on their own. This will be cheaper for the beneficiary as he will put in his own labour and can construct further whenever finances permit.”

Land is the killer

In 2006, banks and home finance companies were barred from funding land transactions. As a result, developers have to rely on private equity players, NBFCs and private lenders to fund land at rates as high as 18-24 per cent.

Ashish Singh, MD, Principal Finance Real Estate, Standard Chartered Bank, says: “Our business is to do projects profitably with a minimum margin of 25 per cent, below which we don’t work. The biggest killer is time variability in monetising and developing a project.”

Already, builders are sitting on unsold inventory of over 9 lakh units in India’s top eight cities. This increases their finance cost and cramps their ability to fund new projects. “When you operate in low margins, lack of control over cost and timeline can wipe out margins,” Singh adds.

Homes in Mumbai, even the ‘affordable’ ones, remain a dream. But even in Delhi, a 400-sq-ft no-frills affordable apartment costs upwards of ₹15 lakh, which a family with an annual income of up to ₹3 lakh cannot afford. And in Tier-III cities, where costs are lower, the demand for affordable housing is not high because much of the workforce is migrating to cities.

Sanjay Sharma, MD of Gurugram-based consultancy Qubrex, points out that the location of EWS housing projects was a major factor why most buyers decided to return them. “A worker in a Gurugram factory has no option but to return a flat in Narela (on the outskirts of Delhi). So will a person with his office in Noida and a flat allotted in Dwarka. Construction of low-cost homes without considering the employment opportunities nearby will not work,” he says. India needs two crore homes to meet the target of housing for all. According to an earlier estimates by research firm JLL, close to 57,392 acres land will be required to build these homes, assuming a size of 500 sq ft per home and an available FSI of four.

Ashish R Puravankara, MD of Puravankara Ltd, says the availability of land at a feasible location and at the right price is what determines preoject viability. “In the price-sensitive affordable housing sector, land price is even more critical. This is why the definition of ‘affordability’ varies from region to region: it boils down to land availability.”

One way of overcoming the problem, says Hiranandani, is to have private sector developers build homes under the public-private-partnership model where the government provides land at zero cost and subsidies to the buyer, and the developer works on low margins.

Puravankara says the government could consider zero GST for affordable housing projects priced at ₹4,000 per sq ft and under.

“Sops in stamp duty and registration would boost buying, since the savings would be at least 15-20 per cent,” he says.

Kapoor adds that the developers’ ability to acquire large tracts of land at low rates is the key to the viability of affordable housing projects. “Unless land costs are rationalised, and approvals speeded up, the situation won’t change.”