Despite a widespread shortage of affordable housing in India, private interest in the space has been negligible. Private equity investors have largely stayed away from this area because of thin margins. Now news reports suggest that Tata Housing Development plans to resume building affordable homes. Is the math beginning to favour developers and can it attract serious investment in the space?
India faces an estimated housing shortage of 18 million units. If the country has to deliver on the promise of “housing for all by 2022”, it translates into completing approximately three million units a year. So the resumption of private interest is good news as, with one of the highest multiplier effects, housing can generate incremental demand for cement and other commodities, labour, white goods, electricals and the like. It has a strong impact on GDP.
Nascent interest in this space had been coming from players like Mahindra Lifespace , Shapoorji Pallonji, Assetz Property Group (Bangalore), VBHC Homes, Brick Eagle Capital etc. With mainstream real estate reeling under a range of stresses that got exacerbated by demonetisation, ‘affordable homes’ may become the new buzz for the sector.
The Union Budget played its part by according ‘Infrastructure Status’ to the affordable housing sector. This will enable developers operating in this segment to raise loans at a cheaper rate, akin to other infrastructure projects. With industry status, banks will be willing to lend more to projects in the affordable housing segment and thus create larger access to funds.
Affordable units will be eligible for 100 percent deduction of profits and gains under Section 80-1BA of the Income Tax Act. Eligibility for claims under this section has now been extended to those completing the project in five years, from three years earlier.
The sops also include developers’ tax relief on unsold stock — they will now need to pay capital gains only in the year the project is completed rather than at the start of the project. Further, the holding period for capital gains tax for immovable property has been reduced from three years to two years.
While the Return on Assets may not look enticing for affordable housing projects, the much reduced cost on debt and access to capital would translate into higher Return on Equity. The access to zero cost customer advances would be an added sweetener for the developer.
On the face of it, the perquisite for RoE expansion looks in place that should eventually encourage long-term capital.
Alongside reducing the cost of capital, the government has perhaps sweetened the deal too much by defining affordable housing by size rather than cost, thereby leaving the doors open for misuse.
The concept of carpet area (the area enclosed within the walls), overriding the dubious builder definition of built-up area (carpet area plus outer walls, balcony and other common areas) has found a place. Thus, a carpet area of 30 square meters in the four big metros of New Delhi, Mumbai, Chennai and Kolkata, and of 60 square meters in smaller cities, make for affordable units. And with this, the actual usable area has increased the benchmark by as much as 20 percent to 40 percent.
A 30-square-meter carpet-area home in a metro city like Mumbai, with loading and exemptions, translates into a 480-square-foot unit. This may entice the smarter developers to develop ‘not so affordable’ compact homes under the garb of affordable housing. The regulations have to come out on who can actually claim the battery of concessions. Otherwise, we may end up witnessing a sizeable chunk of affordable homes landing up in the hands of ‘unaffordable customers’.