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Houses locked out amid shortages

Tier-II cities have to now face a bigger challenge as the scope for absorption There is much less than the big four metros.

Updated: August 30, 2014 11:46:09 am
Housing is an important sector of the Indian economy Housing is an important sector of the Indian economy

By: PSN Rao

Housing is an important sector of the Indian economy with backward and forward linkages with over 260 industries and is a major employment generator only after agriculture. As per estimates of the Central Statistics Office, the housing sector contributes as much as 5 per cent to the GDP of the country. One can witness substantial construction activity in various parts of the country, especially the suburbs of all major cities. Despite this, the housing shortage in India is still over 18 million dwelling units. However, a closer look reveals that while on the one hand, the shortage is huge, there are many houses lying vacant !

Vacancy Rates

Among the big four metros, housing is considered a major problem in Delhi and Mumbai and interestingly, in both these cities, the vacancy rate is very high as compared to Kolkata or Chennai. Further, it is interesting that in tier-II cities, the vacancy rate is in double digits and much higher than the big four metros! This indicates that the tier-II cities have to now face a bigger challenge as the scope for absorption here is much less than the big four. The only exception here is Hyderabad, which stands out as an ideal lone case with a reasonable vacancy rate of around 3 per cent.

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Reasons for Vacant Houses

Investment Driven Market: For long, the Indian real estate market has been seen as a good avenue for parking surplus funds. Real estate is a good investment for many who desire to speculate and pull out after some time so as to book profits, not necessarily to stay in the property. In view of this, we find that houses remain vacant as the investors are looking for quick liquidity of the capital asset value.

NRI End Users: Non Resident Indians have been investing money in Indian real estate with the intention of perhaps returning to India at some point in future. There are also some who desire to come visiting once in a year and stay at the property and keep it locked when not in use. While Kerala is a good example for Gulf based NRIs, many other cities are driven by NRIs based in the IT sector.

Unrealistic Pricing: The developers have in many cases highly overpriced their products and as a result, there has been a general increase in property value. Although in the last two years or so, the appreciation levels have been depressed, this tendency has for long kept genuine end users out of the market and only investors have been buying.

Mismatch between Demand and Supply: The lack of systematic and scientific demand analysis has resulted in a mismatch in supply, not always catering to the demand. As a result, absorption levels remain low and result in high vacancy rates.

Poor Connectivity and infrastructure: Even when people buy, they do not move in and instead, keep their properties locked on account of poor connectivity to their places of work. Most of these new suburbs do not have proper roads, bus services or auto rickshaw services. As a result, people tend to postpone their house moving decisions till such time the connectivity improves. Often, particularly for the housewife, the lack of adequate infrastructure is a major deterrent. This could be either in terms of daily provisions or other amenities such as schools.

Low Rentals: While people do not stay themselves, many do not even rent them out since there is a high perception of the tenant not vacating the apartment. Rent laws and the system of justice delivery in various states still being very difficult, cumbersome, costly and time consuming. One would rather keep the flat locked than give it on rent.

Consequences of Vacancies

Capital Blockage: Vacant houses leads to huge amounts of capital getting blocked and to slow movement of inventory. Buyers continue to pay EMI for a flat in which nobody lives.

Unviable Living: Living in a neighbourhood with a predominantly vacant housing stock all around, makes living unviable. When coupled with poor connectivity and bad infrastructure, there are additional costs to be borne.

Low Returns: High vacancy in turn leads to depressed rental / capital value returns and one can get into a vicious cycle of a depressed real estate market.

Poor Maintenance: When buildings are not occupied, they fall into disuse and disrepair. Maintenance becomes unviable and the result is poor quality.

Another dimension of the problem is the high number of projects that are under construction for years. Project delays, time overruns and cost overrunns only contribute to the phenomenon of high vacancy rates. Developers often over leverage, invest money collected in one project to fund land purchase for another project and so on. This gets into a vicious spiral and may be very difficult for one to get out of.

Way Forward

One needs to address the phenomenon of a high degree of vacant housing and unsold inventories very carefully. While there may be genuine reasons for owners to keep flats locked, the alarming statistics indicate that it is a matter of serious concern. Both the Central as well as the state governments need to formulate a policy framework and fiscal regime so as to encourage home owners to either move in or give their houses on rent. Also, the provision of key elements of infrastructure is a prime mover for quick and meaningful suburbanisation.

Developers also need to get real and work on more scientific and ground realities rather than get into a ‘herd run’. Supply has to cater to demand that is carefully worked out. Further, the public governance gap between real estate developers and citizens in terms of quick public transportation, social facilities and basic infrastructure needs to be filled in urgently by the concerned agencies. What is needed living neighbourhoods, not ghost towns. The housing challenge therefore is not merely about numbers but about right sizing.

The author is Professor and Head ( Housing ), SPA, New Delhi.

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