Why is the common man being out-priced from the housing market? Why do developers prefer to build luxury homes over affordable housing units? These are questions uppermost for any aspiring home buyer who sees affordability going down in metros and whose choices are getting narrower by the day.
But these questions are not that of any home buyer. The same concern is shared by Deepak Parekh, chairman of HDFC, India’s largest home finance company, and figure in his remarks in the company’s annual report for 2013-14. With the NDA government’s emphasis on ‘housing for all’, a lot depends on how these two critical questions are answered.
“Developers are often criticised for not relenting on the exorbitant pricing of residential homes. Part of the problem lies in how developers fund the purchase of land. Regulators prohibit banks and housing finance companies from extending finance to private developers to acquire land. Developers have to then resort to high cost funds… often paying interest rates ranging from 18-22 per cent per annum,” Parekh wrote.
Analysts agree with Parekh’s observation but maintain that bank finance for land purchase since it has inherent difficulties.
“Bank lending for land parcels may be difficult, considering the current NPA levels of banks and their risk capital requirements,” says Anuj Puri, chairman and country head, JLL India, and calls on state governments to play a more pro-active role.
“They need to ensure that there is a clearly defined affordable housing policy, on lines similar to what already exists in Haryana. Ideally, through this policy, affordable housing projects should be allowed on smaller land parcels so that such land under private holding can be monetised effectively. Alternately, the government can release land currently being held by it for affordable housing projects, at nominal rates,” adds Puri.
While finance options for land purchase is a challenge, this can be addressed by suitable government intervention to ensure that land is available, says Anshuman Magazine, CMD, CBRE South Asia. “The government should earmark dedicated land parcels for affordable/mass housing projects, preferably along the suburban locations of emerging cities. With land costs typically forming a reasonable portion of the development cost of an average urban housing project, such a practice could easily take care of key land-related issues. The next step would be to proactively create infrastructure — physical as well as social — and work-to-home connectivity for the target population segment to make such locations habitable,” says Magazine, adding that the government should place this at the heart of its ambitious 100 Smart Cities project.
Coming back to Parekh’s observation, Sachin Sandhir, MD, RICS South Asia, a body engaged in setting standards and certification for the real estate sector, says that bank finance for land purchase is an idea whose time has come, but would need the appropriate valuation framework. “Banks should allow lending on land purchase, as in most tier II and tier III cities buyers still look for acquiring a piece of land and then build a house on it. This is also because in these cities apartments are still not a preferred choice. This would however, require correct valuation of the land by a registered valuer. Faulty price points would lead to increased lending and speculation within the market,” says Sandhir.
While the dual problem of land availability and an efficient method to finance it remains, the second bugbear of the sector, which plays a huge part in pushing up housing costs, is the inordinate delay it takes to get all required approvals in place.
“The solution… lies in putting in place an online single-window clearance mechanism for affordable housing projects. My back-of-the-envelope estimation is that transparency and timely approvals can reduce costs for the end consumer by almost 20 per cent,” Parekh wrote.
Currently there are around 40-50 regulatory clearances needed for a residential building that can take anywhere between 2-3 years. India is currently ranked 182 out of 189 for ease of obtaining construction permits as per the World Bank’s Ease of Doing Business Rankings.
“Until and unless the single window clearance is introduced, cost of the projects cannot be reduced,” says Om Chaudhry, founder of FIRE Capital and chairman & CEO of Astrum Homes, a developer of affordable homes.
“Although the entire housing market is in need of such a clearance process, the efficiency exercise may as well begin with the affordable segment, since this is where India’s maximum urban housing shortage lies,” says Magazine.
Several states have taken the lead in cutting down approval times, but a lot remains to be done. According to a recent study undertaken by accountancy firm Deloitte for the Planning Commission, Andhra Pradesh and Madhya Pradesh have taken the lead in this area, while Gujarat, Tamil Nadu and West Bengal not far behind.
With a reduction in approval timelines, developers call for financial incentives to encourage them to enter this segment of housing.
“The government should also incentivise the developers for building affordable housing projects by providing tax breaks,” adds Chaudhry.
“The home loan limit of Rs 25 lakh should be revised upwards to Rs 35 lakh under the scheme in a bid to benefit an increased number of home buyers who are currently struggling to buy property due to the price escalations,” says Sandhir.
Other industry players call for the restoration of the tax breaks that were withdrawn in 2013. Under that policy, there was a tax holiday on profits for projects with a minimum plot area of 1 acre and unit size less than 1,000 sq ft in Delhi and Mumbai and 1,500 sq ft in other cities approved on or before March 31, 2008.
Developers say that only a holistic solution that encompasses land finance, approvals and price points can ensure that the government’s affordable housing agenda can become a reality. “The government should look at a holistic solution for unlocking supply of affordable homes in the country and for this all three parameters need to be looked into realistically. Capital as we all know is very expensive. Also, the FDI rules as per Press note 2 for construction and real estate need to be rationalised, namely the lock in period for the foreign partner and minimum size of project. The bottom line is that affordability is directly dependent on release of supply of housing stock,” says Getamber Anand, president, Credai-NCR.
With the entry of several marquee names in the affordable housing space, developers are bullish about the potential of this segment. The question remains whether the government can bring about an efficient approvals regime.
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