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Indian real estate industry is going through a prolonged bear cycle and is struggling with huge supply of premium & luxury products. But silver lining is huge demand for affordable housing. According to an estimate by Ministry of Housing and Urban Poverty Alleviation (MHUPA), the urban housing shortage in the country at the end of the 10th Five-Year Plan was estimated to be 24.71 Millions. Additionally, 88% of this shortage pertains to houses for Economically Weaker Sections (EWS) and another 11% for Lower-Income Groups (LIG). This demand – supply mismatch is growing and is estimated to touch ~30 Millions by 2020. Unfortunately, builders in metros target primarily mid-income & luxury segment where demand shortfall is just 0.2%! No wonder the industry is sitting on unsold inventory of ~1 Million units across metros. Below table gives a status of housing shortage in urban India:

Affordable Housing at a glance

Budget 2017 has attempted to define affordable housing from the perspective of tax exemption on the profits. This year’s budget has allowed, houses of up to 30 square meters of carpet area in case of municipal limits of top four metros and 60 square meters of carpet area for rest of the country including in the peripheral areas of metros, 100% tax deduction on profits. More on this can be read here.

Except the tax exemption rule, there is no set definition of Affordable Housing (AH). Ministry of Housing and Urban Poverty Alleviation (MHUPA) has defined Affordable Housing as per the below table:

Few years back Credai and KPMG had defined affordable housing based on three parameters, namely income level, size of unit and affordability. This definition is presented in the below table which appears to be in line with global definition of affordable (public) housing projects.

Key Factors for Growing Demand

(1) Rapid Urbanization

The country’s urban population has grown at a compounded annual growth rate (CAGR) of 2.8% over 2001-11, resulting in an increase in the urbanisation rate from 27.8% to 31.2%. Of India’s population of 1.21 billion, 377 million people are urban dwellers. And with more than 10 million people being added to urban areas every year, India’s urban population is expected to reach about 810 million by 2050.

(2) Rising Income

India has been one of the fastest growing economies in the world with an average GDP growth rate of ~6% in the last 10-15 years. This has created a large number of services & manufacturing jobs in urban & semi-urban areas. Indian economy is projected to grow upwards of 7% for the next few decades generating a large number of well paid jobs in urban and semi-urban areas.

(3) Government Push

To address this growing shortfall of urban housing the current central government launched “Housing for All by 2022” mission in 2015 aimed for urban areas. Several other programs such as Pradhan Mantri Awas Yojna (PMAY), Jawaharlal Nehru National Urban Renewal Mission (JNNURM) and Rajiv Awas Yojna are being run by central government to encourage state governments to focus on urban housing projects especially for slum dwellers. Additionally Budget 2017 has given a huge impetus to affordable housing projects by granting it industry status along with several financial incentives. (You can read more about it in my earlier post here).

Does it make financial sense for builders?

Government on its own cannot deliver 30 million+ affordable housing units in the next decade as it has not only limited resources but also limited capabilities. It can only become an enabler to promote affordable housing. However, private sector participation shall be driven primarily by profits & volumes. Is there enough return on investment and / or profit margin for the builders to execute affordable housing projects?

Cost Analysis

To understand the cost structure of real estate project I request you to read my previous post on it. A low rise affordable housing project (up to G+3) major cost items will be: construction cost (including finance cost) of Rs. 1200/- per sq. ft. and FSI cost of land ~Rs. 200/- per sq. ft. With a margin of Rs. 200/- per sq. ft. end product can be sold at Rs. 1600/- per sq. ft. Hence a typical EWS unit can be sold at Rs. 4.8 Lakhs and a LIG unit at Rs. 9.6 Lakhs.

Note: Affordable Housing project is a volume play for the builders with a decent two digit margin of ~12% post tax (profit from AH housing projects are tax exempted).

Recommendation to Govt

Housing for All shall remain a dream unless both government and corporates become a partner in this mission. Government has to incentivize corporates not only financially but also operationally to take up more affordable housing projects. We suggest below changes to promote acceptance of affordable housing among builders:

(1) Reduce approval timeline

In metros it requires up to 3 years for a builder to launch a project post finalizing the land as over 40 approvals & NOCs ranging from land conversion to commencement certificates are required from both state and central agencies. Government should simplify approval processes for affordable housing projects. They should come out with a single window clearance concept or allow builders to launch the project with an undertaking and conduct audits during construction to ensure all guidelines are being followed. If this process can be shortened to say 3 months builders can save huge amount of cost on borrowings, which can be passed on to buyers.

(2) Amend building development rules

India has the most archaic and weird building plan rules which ranging from unscientific setback norms to unreasonable Floor Area Ratio (FAR). One of the rules that needs to be amended for AF housing is – cap of 50% area coverage on all residential projects in most of metros. Govt. should relax it to say 40-45% to allow builders to build more which in turn will help it to reduce cost of land on per sq ft of developed area. Additionally govt. should focus on creating common basic amenities such as parks & recreational zones for citizen. A lot of such projects, sans sale, have been successfully executed up by several PSUs in their townships created next to their manufacturing units. In fact I would encourage people to visit some of the townships developed by IOC and NTPC for its employees.

(3) State must ensure clean land titles

As per an estimate land and property cases amount to two-thirds of all pending civil lawsuits in the country. The total cost of litigation every year is equivalent to about 0.5 percent of India’s annual gross domestic product of $2 trillion!! I believe time has come for the state to guarantee land titles to rightful land owners. Recently Rajasthan government passed the landmark Rajasthan Urban Land (Certification of Titles) Bills 2016 in the state assembly which is aimed to certify title of individual landowners. Karnataka too has launched a similar initiative called urban property ownership record (UPOR) in few cities such as Shimoga, Mysuru and Mangaluru. Clear titles backed by state governments shall reduce the cost of land in the long term as well.

(4) Capital for Land Acquisition

RBI should allow banks to fund land acquisition for affordable housing projects. This shall lower the cost of capital for builders who usually borrow expensive funds from NBFCs or Private Equity funds for acquiring lands. Builders can save huge cost which can be passed on to buyers.

(5) Increase supply of lands

Central Govt, by way of its PSUs, is the biggest hoarder of land in India. In fact Railways, Ports and Defence own the bulk of it. A 2013 India Development Foundation study indicates these PSUs and Defence ministry own around 1 Million acres of prime land worth over Rs. 10 Lakh Crores across India which are severely underutilised. Government should come out with a national level policy to utilize these land parcels and must allocate a bulk of it for affordable housing. Additionally, states agencies should remove archaic land laws that prevent conversion, utilization and redevelopment of large land parcels within the city limits.

(6) PPP is the way forward:

Government should encourage Public Private Participation (PPP) model in AH projects to ensure high acceptance and transparent delivery process. Also government should encourage bigger builders to execute such projects as they are more transparent in their dealings, are more efficient and have lower cost structure.


Affordable Housing is one such rare industry in India which has humongous demand but suffers badly from supply constraints. What we need is a clear roadmap from the government and a committed private sector to make it a success. Several countries in the east as well as in the west have successfully executed Affordable (Public) Housing Projects and ensured Housing for All. Singapore is the best example of this success story. (I shall be writing about their successful housing scheme soon). India should and must make affordable housing a great success to ensure dignity to all her citizens.

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