More than half of the World’s population lives in Urban areas (UN report quoted in UN Habitat estimate reveals, the world over, around 3 million villagers move to the city every week. India is fast catching up, we already have one third of our population living in urban areas. In India, it is estimated that close to 10 million people will get added to the urban areas every year through the next few decades, taking the urban population to about 810 million by 2050. Though the urban population contributes 70% to the nation’s GDP, surprisingly, they occupy only 4% of total land (source: India Infrastructure research). The Government has already drawn up plans under Pradhan Mantri Awas Yojana (PMAY) scheme to provide affordable housing facility to all by 2022, when the nation celebrates its 75th year of Independence. According to the Government’s mission document, the affordable housing is defined as ‘Pucca’ house with water connection, toilet facilities, 24x7 electricity supply and access.

PMAY launched in June 2015, aimed at constructing 2 crore houses for the urban poor by 2022. The Government seeks to address the housing requirements through multiple program verticals:
• Slum rehabilitation with the participation of private developers using land as a resource
• Promotion of Affordable Housing through credit linked subsidy
• Affordable Housing in Partnership with Public & Private sectors
• Subsidy for beneficiary-led individual house construction

Says, Mr. Ajay Pandey, MD & Group CEO, GIFT, The affordable housing segment is at the tipping point to be the next big growth driver of the Indian economy. The new policy level impetus given by the Government of India and the various schemes for affordable housing by State Governments, has demonstrated the potential to turn around the fortunes of the real estate sector in the near to medium term. The resultant tailwinds in the sector can transform the affordable housing to a financially viable proposition for private developers.”

While the plan is in place, India faces a number of challenges in implementing the affordable housing. Availability of land in urban areas is one of the key challenges. Unlocking the potential of unused or under-used lands held by government bodies and PSUs can come to the rescue. Financing the land is another major challenge that Developers / Builders face in delivering affordable housing. The absence of a clear title is also a serious deterrent to participation by financial institutions and real estate developers in new as well as redevelopment projects of real estate.

Taking these challenges into account, the Ministry of Housing and Urban Affairs in 2017 has announced a spate of initiatives to encourage private sector participation.  The Pradhan Mantri Awas Yojana (Urban), which were limited to construction on government land, now allowed for affordable houses constructed by developers on private land also. It further announced two new models for private investments in low-cost housing on private lands. One, a central assistance of Rs 2.50 lakh per house as interest subsidy on bank loans under Credit Linked Subsidy Scheme (CLSS). Another, a central assistance of Rs 1.50 lakh per house in case the beneficiary does not take a bank loan.

Eligibility for benefits under PMAY:
A family would be considered eligible that has a husband, wife and unmarried children. The beneficiary family should not own a Pucca house (an all-weather dwelling unit) either in his/her name or in the name of any member of his/her family in any part of India. Economically Weaker Section (EWS) is defined as households having an annual income up to Rs 3 lakh. States/Union Territories shall have the flexibility to redefine the annual income criteria as per local conditions in consultation with the Centre.

Criteria for Affordable Housing:


Size of the unit*

Income of household (p.a.)

Economically Weaker Section

30 sq.m.

Up to Rs 3 lakh

Low Income Group

60 sq.m.

Between Rs 3 and 6 lakh

Middle Income Group (MIG)

90 – 110 sq.m.

For MIG I – between Rs 6 and 12 lakh
For MIG II – between Rs 12 and 18 lakh

* Irrespective of the size, the unit should have basic civic services and infrastructure services like toilet, water, electricity, etc.

Credit Linked Subsidy Scheme (CLSS)
CLSS will be provided on home loans taken by eligible urban poor for acquisition, construction of the house. Beneficiaries of Economically Weaker Section (EWS) and Low-Income Group (LIG) seeking housing loans from Banks, Housing Finance Companies and other such institutions would be eligible for an interest subsidy at the rate of 6.5% for a tenure of 15 years or during the tenure of loan whichever is lower. The credit linked subsidy will be available only for a loan amount upto Rs 6 lakh and additional loan beyond Rs 6 lakh, if any, will be at nonsubsidized rate (source: Interest subsidy will be credited upfront to the loan account of beneficiaries through lending institutions resulting in reduced effective housing loan and Equated Monthly Instalment (EMI).
The Government further announced developers can opt for annuity-cum-capital grant-based model, where builders can be given a share of the project cost as upfront payment, or choose cost recovery by builders through rental incomes from houses built on government land. 

Encouraged by the Government’s initiatives, a slew of developers has lined up a robust expansion and investment plans for affordable housing, despite the prolonged slowdown in real estate. Not only large realty firms, but also mid-sized ones are betting big on building and selling homes in the Rs 20-60 lakh segment, propelled by demand from homebuyers and encouraging government tax incentives (source: 18th June, 2017).

Government in full throttle mode

  • Granted infrastructure status to the affordable housing sector. This move would allow access to cheaper finance and open up additional avenues for developers to raise funds. Besides, developers would be entitled to tax exemptions and subsidies.
  • Announced tax relief for builders with unsold, unoccupied completed projects by making the notional rent income on such projects applicable only after one year receiving the completion certificate. This will provide some breathing time for developers to liquidate their inventory.
  • It also reduced the holding period for immovable assets from 3 to 2 years and shifted the indexation for capital gains tax from April 1, 1981 to April 1, 2001. This will reduce capital gains tax for several asset holders by a considerable way at the same time will also induce more property holders to engage in the sale of real estate properties.
  • When it comes to ‘Housing for all’ policy the Government does not want to leave any stone unturned. It understands the importance of aligning the allied segments of ‘Affordable Housing.’ With a view to create a vibrant, sustainable and inclusive rental housing market in India, the Government has formulated the National Urban Rental Housing policy in 2015. This will enable formalisation of rental housing through regulatory and legal frameworks.

Private sector participation
The Ministry of Housing and Urban Poverty Alleviation has finalised a public private partnership policy for affordable housing to encourage private sector participation. Though private sector has had muted participation in the affordable housing space, thus far, the scenario is all set to change. Confederation of Real Estate Developer’s Association of India (CREDAI), the apex body of private real estate developers had announced its first major private investment into affordable housing. It has launched 375 affordable housing projects with an investment commitment of Rs 700 billion. These projects will involve the development of over 86 million square feet to build a total of 237,000 housing units across 53 cities in 17 states, including Maharashtra, Gujarat, Karnataka, Rajasthan, NCR, Telangana, Andhra Pradesh and others.

Mr. Pandey further adds, “The interest subvention schemes announced by the Central Government for middle income group can go a long way in meeting the growing demand from the sector. IL&FS Township & Urban Assets Ltd has conceptualized a value proposition for middle income segment in the design and development of affordable homes. The concept is based on homes with quality construction, lifestyle amenities and infrastructure for the middle income segment which is currently underserved. We will leverage and harness the proven capability of IL&FS Group entities in the successful development and management of infrastructure projects while meeting the aspirations of middle income group.” 

Financial sector stands to gain
The housing finance market, over the years, has reported robust growth despite slowdown in the real estate segment. Further, the lending rates of the banks and Housing Finance Companies (HFCs) have also declined by up to 2 percentage points further boosting the demand for housing credit. The recent surge in HFCs from 33 to 98 augurs well for inclusive sector growth. With Public Sector banks, having large NPAs, slowly vacating this space, this has opened-up opportunities for HFCs in this segment. At the same time, HFCs with their customised offerings around the low-cost housing segment are well poised to tap the opportunity.

FDI in Housing segment
In 2005, the government allowed 100% FDI in the construction development sector under the automatic route, which led to a subsequent boom in the sector in later years. The housing sector has received about $24.29 bn till March 2017, which is about 7% of the total FDI flows since April 2000. Going forward, the sector is likely to witness a rise in FDI inflows owing to the increased transparency in the sector with the introduction of Real Estate (Regulation and Development) Act 2016, Benami Transaction Prohibition (Amendment) Act 2016, the Real Estate Investment Trusts (Amendment) Regulation, 2016 and other legislations.

Further, Securities and Exchange Board of India-registered foreign venture capital investors have now been permitted to invest in companies engaged in affordable housing without complying with the FDI pricing norms. This comes as a big boost to investors since they may not need to set-up PE/FDI-compliant systems to avail investment opportunities in housing projects.

REITs – a new avenue for fundraising
Real Estate Investment Trust (REIT) is a group of income producing assets backed by tangible security providing regular yield to its investors. REITs have the potential to change the dynamics of the real estate sector in India by providing a platform to the real estate developers and investors with core assets to monetise the same; providing an alternative platform to the investors to invest in the real estate without being exposed to a plethora of issues in the real estate sector in India. Though the concept of REITs is yet to take off in India, several new amendments are being made to the REITs regulation for it to be more attractive.

Challenges to tackle
High demand and unsold inventory still coexist in India as a result of price mismatching. Affordable housing units fall out of preference for buyers on account of higher than expected prices.

Mr. Ajay Pandey, MD & CEO, GIFT added, “Pricing mismatch primarily stems from the high cost of land in the urban areas and high construction costs. Further, poor quality construction and homes devoid of amenities essential for a quality life, brings in a mismatch between customer value and price. As mentioned above, we will strive for cost efficiency in our products through efficient construction technology, supply chain management and asset management so as to pass on the benefits to the customers. We will also explore opportunities to develop affordable housing in partnership with various government entities which makes land available at affordable rates a possibility. On top of that, our concept of quality construction and quality lifestyle homes makes it a “value for money” proposition meeting the aspirations of middle income group. The interest subvention schemes and GST benefits offered by the Government would bring down the landed costs as well.”

Some of the other challenges faced by financial companies in the Affordable Housing segment:

  • High processing effort and cost compared to larger loans
  • Loans taken by buyers with no past credit history
  • Lack of collateral to back the loan
  • High land and construction costs make projects unviable

Future outlook
The affordable housing sector is at an inflection point and is expected to be the next big growth driver of the Indian economy with industry experts predicting a phenomenal growth rate in the medium term. An ICRA report says the affordable housing segment in India is set to grow at a faster pace than the rest of the real estate sector – over 30% in the medium term. The current housing deficit in India stands at 19 million units, which offers a huge opportunity for realty players in the affordable space. Also, the rising income level of the working class is driving the demand for affordable housing, particularly in Tier I and II cities. Affordable housing promises growth, but with thin profit margins, which is why developers were shying away from investing in this space. But the government is now incentivising the private sector to participate and the response has been encouraging.
Government’s visible action in narrowing down the demand-supply gap is extremely inspiring. In the last two years, the government has made concerted efforts to iron out the majority of the issues through fiscal stimulus and other incentives to developers. Over the next four years, until 2022, a wide section of people at the bottom of the pyramid are expected to be brought under the housing net, benefitting the economy at large.
The sector with its backward and forward linkages to 250 ancillary industries, has the potential to generate significant employment opportunities and provide a quantum jump to the economy. If the estimated Rs 25 trillion of investment kicks in by 2022, it will be a huge boost to the economy. It is estimated that the flourishing affordable housing market will give a tailwind of as much as 75 basis points (100 basis points equals to one percentage) to India’s GDP between 2018 and 2024 (source: India Infrastructure Research).

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