Roadblocks for Developers
The contraction of the real estate market following the 2008-
2009 economic slowdown
initially drew developer attention into the lower-income sector.
India’s largest developer for
example, Delhi Land & Finance (DLF), announced in 2009 that
it would build 100,000 units
across large cities in the under Rs.20 lakh category. However,
for developers like DLF, the
interest was only temporary. In a recent interview with the
Economic Times, the executive
director at DLF stated, “such projects are not viable anymore. In
2009 there was a downturn in
the global economy … but now prices have gone up and it does
not make much business sense to
launch such projects.” As Jones LaSalle Group writes, “In India,
private developers primarily
target luxury, high-end and upper-mid housing segment, since it
fetches a premium over low income housing. Not surprisingly,
RBI’s House Price Index finds that house prices have nearly
doubled since 2008-2009. These market realities pose a systemic
hurdle to bridging the gap
between cursory interest in and actual execution of the
construction of low-income housing units.
These dynamics have naturally contributed to the 18.78 million
housing shortage urban India is
currently grappling with. Deloitte Monitor found that nearly 40
percent of the total market
potential is between 4-6 lakh, but only around 10% of projects
are offering houses at this price
point, because the money is still in higher income markets.
The smallest units being built by conventional developers in an
average urban area fit the
government’s definition of affordable housing for the LIG
segment—500 feet. Yet they are
priced at over Rs. 5 lakh. Using a price to annual income ratio of
around 3.5, Monitor Deloitte
discovered that a household earning Rs. 11,000 ($183) a month,
which was above the cutoff for
an LIG household at the time of its study, could barely afford
such housing even if it received
financing. As the income distribution of India is heavily skewed
towards the bottom, Monitor
also found that over 80 percent of India’s urban households earn
less than Rs.11,000 per
month. Recall that low-income housing includes any housing
below 10 lakhs, which is double
the price point that is unaffordable for 80 percent of Indians.
The implications of this reality are the crux of the affordable
housing crisis India faces.
Firstly, it is crucial to remain vigilant as to what the private
sector markets as housing for the
low-income or affordable housing, because low-income housing
projects are often intentionally
too expensive to serve anyone but the middle income. Secondly,
as over 80 percent of India’s
urban population is completely priced out of the current real
estate market even with some
financing, housing finance innovations for the customer must be
supplemented by encouraging
developers to actually build proper low-income units that can be
bought by the LIG segment.
Progress in only one front is insufficient to tackle the vast
housing market shortages low-income
Indians are currently grappling with.
Yet the battle is not only enticing developers to the low-income
housing space, but also
convincing them to stay. Economic Times cautions, “Many large
players have also left this space
as it’s tough to operate in the low-margin environment.”
Affordable housing projects have
margins 15-20 percent lower than conventional development
projects. A huge factor for the low
margins is land prices. In a 2013 study, Monitor Deloitte found
that over half of surveyed
developers stated the availability of affordable land was one of
their top two business
challenges. If the land itself is so expensive, even well
intentioned developers have little
incentive to truncate their profit margins by catering to low-
income Indians through building
small, affordable units. The scarcity of affordable land linked
with local transport in Indian city
centers means that the LIG segment is consistently getting
outcompeted by prospective MIG and
HIG home owners and renters. The few low-income housing
projects stand upwards of seventy five to one hundred
kilometers away from cities.
Another costly hindrance is the Indian bureaucracy. According
to the Indian consulting
firm KPMG, due to several varieties of approvals demanded by
the municipal, state, and central
bodies, it can take up to three years for a developer to begin
construction after entering into a
land purchase agreement when it should ideally take no longer
than a few months. KPMG
estimates that project approval delays could add between 25 and
30 percent to the project cost.
These delays add unnecessary project costs to affordable
housing projects that further stall their
already slow progress. India’s notorious bureaucracy has reasons
for its slow churn—there are
numerous interests to balance and protect in such a populated,
multi-class, multi-ethnic nation.
However, the multiple statutory approvals required, some rooted
in bribery and corruption, is
prematurely choking vital housing supply. At the state and
municipal level, the government must
bring efficiency in the market for land approval processes.
In addition, the considerable amount of non-marketable urban
land owned by the
government inflates land prices and exacerbates land shortages.
These land parcels should be
deployed to better use, such as low-income housing units. City
governments should likewise
establish zoning amendments to promote high-density housing,
which ameliorates the pressure of
costly land acquisition, and create zoning policies to devote
areas in a city exclusively for Low-
Income housing. Though the Central Government recommends
states reserve 20-25 percent of
developed land for EWS(Economically Weaker Sections) or LIG housing
in every Government or privately built residential
project, only a handful of states (mostly in southern India) have
executive instructions to this effect.
