 "Pot of gold in a low-cost house")
There is a huge unmet need for low-cost housing in urban India. A large number of poor but earning households, now renting terrible places in slums, can afford to pay for and own low-cost homes. The technology to produce these exists and the institutional mechanism for them to come up has been partly put in place in the last few years.
But for most of the earning poor in urban India to be able to spend their lives in minimum livable conditions, two more developments need to take place. Government at all three levels - central, state and urban-local - has to come up with more enablers like easier, quicker and simpler building plan sanctioning processes; and removing a lot of the government levies currently being imposed.
But what is perhaps the most important, business - which is till now almost wholly geared to meeting the needs of the better off - has to see the opportunity available and come forward. Till now an opportunity worth Rs 5 lakh crore or more, equal to around 5 per cent of GDP, is largely going begging. This is because India's builders mostly aim for buyers who can afford homes worth Rs 25 lakh or more and constantly seek to add frills to claim premium value and earn higher margins. Overall, the Indian system and its property developers, with some exceptions, are missing out on enormous wealth lying at the bottom of the housing pyramid.
According to a recent study by Deloitte, in the last five years 80,000 homes in the Rs 3-10 lakh range have been created when the gap in the supply of low-cost housing is over 15 million. With the interest subsidy now available, a family earning as little as Rs 8,000 a month can afford a Rs 4 lakh home. Given current land and construction costs, it is possible for housing companies to build 13- 15 million homes in the Rs 4-10 lakh price range. This translates into an opportunity of Rs 8.5 lakh core in housing and Rs 7.6 lakh crore in housing finance.
Before we go any further, one red herring needs to be got out of the way. The foremost constraint with low-cost housing is not land (important as it is) but lengthy and tedious approval processes and rising labour and construction costs. Land is there, both within urban areas - in the existing slums - and the periphery. You can see the land as soon as you stop looking just at metros and two million-plus cities. Their problems are special. For the majority of urban India, land at the periphery is affordable for low-cost housing. What you need is a bit of push to public transport to enable those in the periphery to come to work within the urban area.
As for slums, in an atmosphere in which a non-functioning government is blamed for most ills, civil society has to come forward and meet its own deficit in delivery. The wherewithal for slum-dwellers to get together and develop decent housing now exists. The Rajiv Awas Yojana (RAY) outlines scope for in situ development of slums by involving slum-dweller through various models - beneficiary-built, community-based and public agency-led. They will have to take ownership of their slum development to create better homes which they will not want to sell and move into another slum. Somebody has to help them form associations, engage builders and access finance so they can own clean, well-designed 300 sq ft carpet area homes of a room, kitchen and bath. RAY speaks of viability gap funding and property rights for slum-dwellers.
The big issue in attracting institutional finance, shareholders' money, to low-cost housing is the risk of borrower default. How do you select a borrower who, along with spouse, earns Rs 8,000-12,000 a month when neither his driver's salary nor his wife's maid salary comes with a pay slip. And between themselves they have absolutely nothing to pledge. Now here's a revelation from Deloitte. The rate of default of housing loans taken out at the bottom of the pyramid is less than 1 per cent.
That is not all. The government moved late last year to create a credit guarantee setup to take care of the under 1 per cent default. Ajay Maken, the then union minister for housing, launched the credit risk guarantee fund scheme for low income housing. The fund, in the form of a trust with an initial corpus of Rs 1,200 crore, will be managed by the National Housing Bank. State Bank of India, Central Bank of India and HDFC have already entered into an agreement with the credit guarantee trust. Backed by the guarantee covering default, the only security that the lenders will have is their charge over the home they have helped construct or upgrade.
But the government still has a long way to go. When two years ago Janaadhar Shubha, led by, among others, Ramesh Ramanathan, co-founder of Janaagraha, launched their low-cost housing project near Bangalore, the cheapest apartment at Rs 7 lakh was way above their initial target. In this, the government took away Rs 1.7 lakh! It is not just stamp duty payable during registration right at the end of the process and the actual fees payable for plan sanction but the opportunity cost of chasing a sanction for 18 months at the minimum.
Ramanathan lists nine agencies which have to sanction building plans, starting from the ministry of environment and forests and the pollution control board to the water and power utilities. To get a plan sanctioned, after land acquisition, it takes between 12 and 24 months. The challenges in affordable housing are complexity of rules, ambiguity in interpretation, enormous delays and uncertainties which reduces the risk appetite of developers and tends to raise returns considered necessary to compensate for the risk. To make affordable housing happen, developers need access to clear land titles, streamlined plan sanctioning processes and simplified procedure to get the subsidies which have been sanctioned. Ideally the whole process - from land acquisition to delivering the property -should not take more than 24 months.
According to Deloitte, despite these hurdles, there has been a pickup in low-cost housing development in the last seven years and builders speak of robust demand. Over time small developers have proliferated and the number of housing finance companies catering to low income customers has crossed 10 with a current loan book of over Rs 1,000 crore. Disbursal by new companies is growing annually at 100-300 per cent. Almost 60 per cent of property developers have met their profit expectations. Most important, 90 per cent of developers want to continue in low-cost housing. Not only do new housing finance companies have near zero non-performing asset, or NPAs, even delayed payments are at 2-5 per cent.
Delivering low-cost housing to the poor is not something which can be achieved in one go. You can't get it right with your first project, which should be treated as a learning process. Two early starters have been Janaadhar Shubha led by Ramanathan and Value and Budget Housing Corporation (VBHC) promoted by Jerry Rao, both former international bankers. At the end of the day they find that the apartments are valued at much more than what they were intended to be and have gone to people above the income group originally targeted.
VBHC initially targeted families with a monthly income of Rs 15,000-40,000 but found that the owners were in the Rs 40,000-70,000 range. "While the target audience continues to be young professionals buying their first homes," Rahul Sabharwal, COO of VBHC, told The Times of India, "20-30 per cent of our buyers are buying the homes as an investment." Price appreciation since the launch in 2010, from Rs 1,500 per square foot to above Rs 2,500 per square foot has contributed towards this investment sentiment. At the time of the launch the apartments were in the Rs 4.5-10 lakh range. Now they are valued in the Rs 12-30 lakh range.
Ramanathan says he has learnt two lessons. One involves the transition period. "A middle class family can pay its EMI and rent during the transition period until the new home is complete. For families earning Rs 12,000 per month, this is very difficult." Even if such a family can somehow manage the transition, it finds it difficult to pay an EMI of Rs 4,000-5,000 after meeting regular family expenses. Armed with the learning, Ramanathan is going to tweak his strategy. "In our next project we will offer smaller 300 square feet homes which would result in a cost reduction of 25 per cent." That will mean lower costs and more affordable EMIs. These would go down further if finance companies could access funds cheaper. They borrow at 9.5 to 14 per cent, add 1-1.5 per cent towards their own cost and lend at 11-17 per cent. Customers, for their part, find the cash component a major problem as also non-transparent maintenance charges.
Ramanathan and others, with their eyes set on making a success of low-cost housing, are learning and adapting. Mainstream builders, however, continue to dwell on their well-worn themes. Navin Raheja, president of the National Real Estate Development Council, said at a recent discussion on affordable housing, "Industry (infrastructure) status should be granted to the realty sector." This will help the sector get incentives, subsidies and tax benefits, which will, in turn, lead to lower cost of funding for builders and cheaper housing loans from financial institutions. Hurdles in the way of promoting affordable housing are current floor area ratios, or FAR, and long approval processes. Since land costs in major cities are high, "an upward revision of FAR, ground coverage and population density norms are required on a priority basis."
The social gains from low-cost housing are enormous. Deloitte found that the new owners like their homes because of better living conditions, better amenities, larger units and good neighbours, though they regretted the remoteness of location and lack of transport to the city. Housing has changed their lifestyles and improved their lives. They have a new sense of belonging, a pride in owning their own place, where they are not embarrassed to have visitors. More robust entrepreneurial interest in low-cost housing can bring about a social revolution - and lead to the gentrification of a large part of the nation.
But for most of the earning poor in urban India to be able to spend their lives in minimum livable conditions, two more developments need to take place. Government at all three levels - central, state and urban-local - has to come up with more enablers like easier, quicker and simpler building plan sanctioning processes; and removing a lot of the government levies currently being imposed.
But what is perhaps the most important, business - which is till now almost wholly geared to meeting the needs of the better off - has to see the opportunity available and come forward. Till now an opportunity worth Rs 5 lakh crore or more, equal to around 5 per cent of GDP, is largely going begging. This is because India's builders mostly aim for buyers who can afford homes worth Rs 25 lakh or more and constantly seek to add frills to claim premium value and earn higher margins. Overall, the Indian system and its property developers, with some exceptions, are missing out on enormous wealth lying at the bottom of the housing pyramid.
According to a recent study by Deloitte, in the last five years 80,000 homes in the Rs 3-10 lakh range have been created when the gap in the supply of low-cost housing is over 15 million. With the interest subsidy now available, a family earning as little as Rs 8,000 a month can afford a Rs 4 lakh home. Given current land and construction costs, it is possible for housing companies to build 13- 15 million homes in the Rs 4-10 lakh price range. This translates into an opportunity of Rs 8.5 lakh core in housing and Rs 7.6 lakh crore in housing finance.
* * *
Before we go any further, one red herring needs to be got out of the way. The foremost constraint with low-cost housing is not land (important as it is) but lengthy and tedious approval processes and rising labour and construction costs. Land is there, both within urban areas - in the existing slums - and the periphery. You can see the land as soon as you stop looking just at metros and two million-plus cities. Their problems are special. For the majority of urban India, land at the periphery is affordable for low-cost housing. What you need is a bit of push to public transport to enable those in the periphery to come to work within the urban area.
As for slums, in an atmosphere in which a non-functioning government is blamed for most ills, civil society has to come forward and meet its own deficit in delivery. The wherewithal for slum-dwellers to get together and develop decent housing now exists. The Rajiv Awas Yojana (RAY) outlines scope for in situ development of slums by involving slum-dweller through various models - beneficiary-built, community-based and public agency-led. They will have to take ownership of their slum development to create better homes which they will not want to sell and move into another slum. Somebody has to help them form associations, engage builders and access finance so they can own clean, well-designed 300 sq ft carpet area homes of a room, kitchen and bath. RAY speaks of viability gap funding and property rights for slum-dwellers.
The big issue in attracting institutional finance, shareholders' money, to low-cost housing is the risk of borrower default. How do you select a borrower who, along with spouse, earns Rs 8,000-12,000 a month when neither his driver's salary nor his wife's maid salary comes with a pay slip. And between themselves they have absolutely nothing to pledge. Now here's a revelation from Deloitte. The rate of default of housing loans taken out at the bottom of the pyramid is less than 1 per cent.
That is not all. The government moved late last year to create a credit guarantee setup to take care of the under 1 per cent default. Ajay Maken, the then union minister for housing, launched the credit risk guarantee fund scheme for low income housing. The fund, in the form of a trust with an initial corpus of Rs 1,200 crore, will be managed by the National Housing Bank. State Bank of India, Central Bank of India and HDFC have already entered into an agreement with the credit guarantee trust. Backed by the guarantee covering default, the only security that the lenders will have is their charge over the home they have helped construct or upgrade.
* * *
But the government still has a long way to go. When two years ago Janaadhar Shubha, led by, among others, Ramesh Ramanathan, co-founder of Janaagraha, launched their low-cost housing project near Bangalore, the cheapest apartment at Rs 7 lakh was way above their initial target. In this, the government took away Rs 1.7 lakh! It is not just stamp duty payable during registration right at the end of the process and the actual fees payable for plan sanction but the opportunity cost of chasing a sanction for 18 months at the minimum.
Ramanathan lists nine agencies which have to sanction building plans, starting from the ministry of environment and forests and the pollution control board to the water and power utilities. To get a plan sanctioned, after land acquisition, it takes between 12 and 24 months. The challenges in affordable housing are complexity of rules, ambiguity in interpretation, enormous delays and uncertainties which reduces the risk appetite of developers and tends to raise returns considered necessary to compensate for the risk. To make affordable housing happen, developers need access to clear land titles, streamlined plan sanctioning processes and simplified procedure to get the subsidies which have been sanctioned. Ideally the whole process - from land acquisition to delivering the property -should not take more than 24 months.
According to Deloitte, despite these hurdles, there has been a pickup in low-cost housing development in the last seven years and builders speak of robust demand. Over time small developers have proliferated and the number of housing finance companies catering to low income customers has crossed 10 with a current loan book of over Rs 1,000 crore. Disbursal by new companies is growing annually at 100-300 per cent. Almost 60 per cent of property developers have met their profit expectations. Most important, 90 per cent of developers want to continue in low-cost housing. Not only do new housing finance companies have near zero non-performing asset, or NPAs, even delayed payments are at 2-5 per cent.
Delivering low-cost housing to the poor is not something which can be achieved in one go. You can't get it right with your first project, which should be treated as a learning process. Two early starters have been Janaadhar Shubha led by Ramanathan and Value and Budget Housing Corporation (VBHC) promoted by Jerry Rao, both former international bankers. At the end of the day they find that the apartments are valued at much more than what they were intended to be and have gone to people above the income group originally targeted.
VBHC initially targeted families with a monthly income of Rs 15,000-40,000 but found that the owners were in the Rs 40,000-70,000 range. "While the target audience continues to be young professionals buying their first homes," Rahul Sabharwal, COO of VBHC, told The Times of India, "20-30 per cent of our buyers are buying the homes as an investment." Price appreciation since the launch in 2010, from Rs 1,500 per square foot to above Rs 2,500 per square foot has contributed towards this investment sentiment. At the time of the launch the apartments were in the Rs 4.5-10 lakh range. Now they are valued in the Rs 12-30 lakh range.
Ramanathan says he has learnt two lessons. One involves the transition period. "A middle class family can pay its EMI and rent during the transition period until the new home is complete. For families earning Rs 12,000 per month, this is very difficult." Even if such a family can somehow manage the transition, it finds it difficult to pay an EMI of Rs 4,000-5,000 after meeting regular family expenses. Armed with the learning, Ramanathan is going to tweak his strategy. "In our next project we will offer smaller 300 square feet homes which would result in a cost reduction of 25 per cent." That will mean lower costs and more affordable EMIs. These would go down further if finance companies could access funds cheaper. They borrow at 9.5 to 14 per cent, add 1-1.5 per cent towards their own cost and lend at 11-17 per cent. Customers, for their part, find the cash component a major problem as also non-transparent maintenance charges.
Ramanathan and others, with their eyes set on making a success of low-cost housing, are learning and adapting. Mainstream builders, however, continue to dwell on their well-worn themes. Navin Raheja, president of the National Real Estate Development Council, said at a recent discussion on affordable housing, "Industry (infrastructure) status should be granted to the realty sector." This will help the sector get incentives, subsidies and tax benefits, which will, in turn, lead to lower cost of funding for builders and cheaper housing loans from financial institutions. Hurdles in the way of promoting affordable housing are current floor area ratios, or FAR, and long approval processes. Since land costs in major cities are high, "an upward revision of FAR, ground coverage and population density norms are required on a priority basis."
The social gains from low-cost housing are enormous. Deloitte found that the new owners like their homes because of better living conditions, better amenities, larger units and good neighbours, though they regretted the remoteness of location and lack of transport to the city. Housing has changed their lifestyles and improved their lives. They have a new sense of belonging, a pride in owning their own place, where they are not embarrassed to have visitors. More robust entrepreneurial interest in low-cost housing can bring about a social revolution - and lead to the gentrification of a large part of the nation.