Affordable Housing in India

02 March, 2020

1. Current Scenario in Affordable Housing in India

Affordable housing in India as seen today has evolved through a variety of phases and transitions
through specific agendas as implemented by the policy makers to cater to the housing demand of the
citizens. Over the years following schemes were launched:

a. Jawaharlal Nehru National Urban Renewal Mission (JNNURM):

- Launched in 2005
- Aimed to construct 1.5 million houses for urban poor
- Applicable in cities having a population of more than 1 million.
b. Integrated Housing & Slum Development Program (IHSDP):
- Launched to merge National Slum Development Policy (NSDP) & Valmiki Ambedkar Awas
Yojana (VAMBAY)
- Aimed at in-situ development of informal settlements / slums
- 80:20 partnership for funding the projects between Centre & State
c. Rajiv Awas Yojana (RAY):
- Launched in 2013
- Focused on developing slums by providing better socio-economic opportunities by creating
infrastructure for informal commercial activities, livelihood centers etc. along with housing for
slum dwellers

While efforts to provide low cost housing have been made for many years (National Housing Policy,
1994; Jawaharlal Nehru National Urban Renewal Mission, 2005 (JNURM); Rajiv Awas Yojana (RAY,
2013), the Pradhan Mantri Awas Yojana (PMAY) launched in 2015 provides a fresh impetus – the
PMAY-Urban (PMAY-U) subsumes all the previous urban housing schemes and aims at ‘Housing for
All’ to be achieved by the year 2022. The total housing shortage envisaged to be addressed through
the PMAY-U is 20 million.

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Progress Made under PMAY as on December 2019
As per the data released by the government in public domain, under the PMAY scheme, following
milestones have been achieved as on December 2019

Construction &
infrastructure being
the second-largest
contributor to the
GDP, a boost in
affordable housing
segment has
resulted in growth
of allied industries
as well. The
adjacent chart
highlights the same:

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Real Estate Market Response to PMAY
Affordable housing today is an integral part of the national agenda with maximum significance in the
urban areas. The policy push and various SOPs offered to catalyse market conditions has started
yielding better results in terms of public & private partnership.

The total supply of affordable housing across the top 7 cities in India during the last six years is
estimated to be 7.65 lakh units which account for nearly 38% of the total supply of residential units.
The total absorption of affordable housing across these cities has been around 5.95 lakh units with
NCR, MMR and Pune witnessing the highest volumes of absorption as of Q1 2019.

Following sections are give a brief snapshot of various micro-markets

Maharashtra
- The share of affordable housing in MMR has increased from 30% in 2017 to 40% in 2018.
- In Mumbai Metropolitan region, nearly 80% of the supply in Peripheral Central Suburbs and
Peripheral Western Suburbs are in the affordable housing segment during 2013 to 2018.
- While the overall real estate market has performed sluggishly, affordable housing, especially
projects targeted on MIG & LIG+ segments have seen steady absorptions.

Maharashtra’s new PPP policy to fast track affordable housing:

- Draft for Public-Private Partnership policy for boosting affordable housing being prepared
- Development to be done on land owned by private parties in partnership with MHADA
- Designs, approvals, construction & selling of the project to be handled by MHADA
- Landowner would share 50% of the project profits without having any responsibility or liability

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 2. Challenges & Probable Solutions for Boosting Affordable Housing
While the continued efforts of the Government and other stakeholders to boost affordable housing
have generated positive outcome, there are various factors affecting the pace of affordable housing
development in India and restricting private sector participation:
Challenges
Lack of suitable low-cost land within the city limits:
Lack of available land in core areas of the cities has
affected the development of the affordable
housing sector. The available land parcels are also
expensive, which is not suitable for affordable
housing developments.
Scarcity of land in urban centres most of the
affordable housing projects are pushed to
peripheral regions of urban areas which poses the
challenge of lack of connectivity & available
infrastructure in the surrounding area, thus
hindering active participation.
Obtaining Statutory Approvals:
The co-ordination with various statutory agencies
and obtaining approvals for development is a
tedious task in India.
Over 20-30 clearances needed for each housing
project, that too from multiple authorities
Takes over 2 years for obtaining all the approvals,
increasing the gestation period and project cost
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Solution
Earmarking & reserving land parcels in master plan
for affordable housing development
Incentivizing development through higher FSI /
FAR / TDR etc. on a subsidized cost.
Development of infrastructure & connectivity
services to increase footprint of urban centers and
policies such as Transport Oriented Development
zones etc.
Utilizing land parcels of defunct PSUs, surplus land
under railways, airports etc. for meeting housing
demand.
Introduction of single-window clearance systems
to fast-track the approvals & minimizing the project
cost.
Implementing common development control
regulations for affordable housing projects across
geographies
Constituting special planning authorities
responsible for such developments
Capacity building of implementing agencies to
enable them get a thorough understanding of the
complete life cycle of projects developed through
new modes of project development e.g. Public
Private Partnerships (PPPs)
Preparation of a set of guidance documents such
as model bidding documents and concession
agreements which could serve as base documents
for implementation agencies, thereby saving
efforts, time, cost and avoiding implementation
issues.
Absence of large organized real estate players due
to:
- Low profit margins
- High sensitivities to changes in input
costs, project delays, etc.
- Lack of availability of skilled manpower
High cost of projects & funds:
- Relatively high cost of material & allied
services for smaller projects and
peripheral locations
- High cost of funds for construction finance
(Developers in this segment are typically
city/region specific having limited
bandwidth) making these projects
unviable
- Lack of suitable credit enhancing financial
products for developers
Challenges in beneficiary selection:
- Beneficiaries do not relocate to the units
allotted to them (location not suited to
their occupation)
- Challenges in beneficiary selection
process
- Lack of a beneficiary database to facilitate
AH developers/ FIs to identify their target
customers
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Promotion of knowledge sharing platforms/
forums to help developers understand the best
practices/models adopted in other states, adoption
of low-cost construction technologies and
workable solutions to reduce construction costs,
among others.
Awareness generation about low cost
technologies already piloted and demonstrated.
Provision of guidance on rates and costs through
authorized agencies (such as PWD Schedule of
Rates)
Training and skilling the construction manpower in
emerging and low-cost technologies and
developing a pool of skilled manpower
Access to low cost construction finance.
Reduction in rate of various premiums / approvals
/ FSI / FAR / TDR cost or cross-subsidizing the
same in lieu of construction of affordable housing
in core city areas
Incentivizing developers through reduction / waiver
in stamp duty / GST / property tax etc. for
affordable housing component in projects
Regulating financial markets & incentivizing
financial institutions for funding affordable housing
projects
Creating robust & dynamic beneficiary databases
for various locations & socio-economic
backgrounds for identifying target demography
Linking unique identification numbers and use of
big data analysis to track potential allottees and
planning the affordable housing development in
such pockets
Lack of access to credit (beneficiaries):
- Irregular, informal income sources with
variations due to seasonality
- Risk management practices, cost
structures of Banks, HFCs not aligned to
these kind of customers
- Higher lending rates (small loan size,
higher perceived risk)
- Lack of awareness among customers
about financing options and GoI schemes
such as Credit Linked Subsidy Scheme
(CLSS)
Operations & Maintenance of Affordable Housing
Project:
- Negligence in maintenance of Affordable
Housing units creating ‘New Urban Slums’
- Lack of sufficient funds/Institutional
mechanism to facilitate the required
maintenance
- Resale / Leasing of allotted unit by the
actual beneficiaries to other parties and
moving to new slums or informal
settlements post development of project
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Mass marketing of various schemes & educating
beneficiaries about them to spread awareness
Mandating a portion of project funds to be utilized
in establishing a help desk to improve financial
literacy of the beneficiaries
Transferring maintenance responsibility to a
specialized ‘Asset Management Firm’ with annuity
payments from the Authority could be considered.
Evolving private participation models where
developers are mandated to undertake
maintenance activities for a longer period (e.g. 7-
10 years) with corresponding annuity payments
from the authority (Annuity payments only to cover
maintenance costs).
Creation of a revolving maintenance fund with an
initial corpus fund (could be included in the project
cost) to cover maintenance costs for a long period.
Periodic audits of the quality of assets created
along with maintenance & occupancy audits
 3. Policy Push & Driving Force for Affordable Housing
RERA Act, 2016 Aimed to bring transparency and accountability on the part of the developers and
to organize the real estate sector in India
A total of 43,025 projects have been registered across 30 States / UTs of India
29 States / UTs have established regulatory Authority and 22 States / UTs have
established Appellate Tribunals
Has helped homebuyers in taking informed decisions and prevent malicious
activities
Defined various terminologies such as carpet area, built-up area, etc. used in real
estate thus bringing in a uniform system helping in implementation of various
rules, policies, subsidies, exemptions etc. across the industry.

Infrastructure Govt. of India through Union Budget 2017-18 granted “Infrastructure” status to
Status affordable housing segment.
It will help affordable housing developers to avail funds from different channels,
like external commercial borrowings (ECB), foreign venture capital investors
(FVCI) and foreign portfolio investors (FPIs).
This will also enable these projects to avail the associated benefits such as tax
concessions.

National Urban A National Urban Housing Fund for Rs. 60,000 crores has been set up for raising
Housing Fund Extra Budgetary Resources (EBR) in phases for the rapid implementation of
PMAY (U). A sum of Rs. 8,000 Cr. was mobilised under this fund in FY 2017-18.
In FY 2018-19 approval has been secured to raise Rs. 25,000 Crore under this
mechanism out of which a sum of Rs. 5050 Crore has been already raised and
disbursed to the States/UTs and CNAs.
This process of raising resources through EBR ensures that there will be
unhindered availability of resources for PMAY(U).

Reduction of GST Effective 1-April-2019, GST rate for under-construction affordable homes has
been slashed to 1% per cent from 8%, while for all other under-construction
houses, the GST rate has been reduced to at 5% (without ITC) against the present
rate of 12%.
This has resulted in reduction of capital values for the homebuyers and has also
boosted compliance within the Developer community

Affordable Housing Affordable Housing Fund (AHF) with initial corpus of Rs. 10,000 Cr. was created
Fund of INR 10,000 to reduce interest burden on the beneficiaries of affordable housing projects, and
Crore was funded from priority sector lending shortfall and fully serviced bonds
authorized by the Government of India.
The fund was established in National Housing Bank (NHB) as announced by the
in the General Budget for 2018-19. The corpus of the Fund will be 10,000 crores
and will be contributed by Scheduled Commercial Banks as allocated by the
Reserve Bank of India (RBI). The first tranche of 2,500 crores was received by

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 NHB in August, 2018 & it has disbursed the entire amount of 2,500 crores by
30-November-2018.

Income Tax 1. Tax Benefits to developers under section 80IBA

Benefits
Deduction eligible to be claimed: 100% of the profit (with respect to project
approved between June 2016 & March 2021).

Conditions to be Fulfilled [Section 80-IBA]:

• Size of the plot, area of residential units and minimum utilization of FAR
(floor area ratio) should satisfy the criteria given below –

Area of Plot of Carpet Area of

Utilisation of
Land on which Residential Units
Location of Project Permissible FAR
Project is comprised in the
(Floor Area Ratio)
situated Housing Project

Project is located Not less than Not to exceed 30 Not less than
within the cities of 1,000 square square metres 90%
Chennai, Delhi, metres
Kolkata or Mumbai
(Metro)

Project is located in Not less than Not to exceed 60 Not less than
any other place (Non- 2,000 square square metres 80%
Metro) metres

• The developer completes the project within a period of 5 years from the
date of first approval by the competent authority. Initially, the completion
period defined was 3 years.

• The project shall be deemed to have been completed when a certificate

of completion (OC) of project as a whole is obtained in writing from the
competent authority. (If the OC is not received within the stipulated
period, the benefits availed if any, have to be reversed)

• Only one project is allowed on the land earmarked for any such housing
project.

• Only one flat can be allotted one household.

• The carpet area of the shops and other commercial establishments

included in the housing project does not exceed 3% of the aggregate
carpet area.

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 • Where a residential unit in the housing project is allotted to an individual,
no other residential unit in the housing project shall be allotted to the
individual or the spouse or the minor children of such individual.

• The developer should maintain separate books of account in respect of

the housing project.

This extension of the dateline to 31-March-2021 has been done to ensure

continued interest of developers for the construction of affordable housing
projects and help achieve the Housing for All objective of the government.

2. Tax Benefits to homebuyers / beneficiary:

• In the July Budget 2019, the maximum amount of interest paid on a

housing loan eligible for tax benefit was increased to Rs 3.5 lakh from Rs
2 lakh earlier i.e. an increase of Rs 1.5 lakh for buying a house under
affordable housing scheme. An additional tax benefit was given to the
first-time home buyers buying house property whose stamp duty value
is up to INR 45 lakhs. The the relief will be available for loans sanctioned
till 31- March-2021.

Alternate Alternate Investment Fund (AIF) of INR 25,000 Cr. for last mile funding of
Investment Fund stalled housing projects.
(AIF) of INR 25,000
The Rs 25,000-crore fund will act as a booster for affordable and middle housing
Cr.
projects as it will immediately trigger demand for key raw material for a housing
project i.e. labour, cement and steel — sectors that have been reeling under the
impact of a slowing economy — as they are directly linked with construction.

These core sectors have traditionally been major job creators. The realty fund
will speed up the completion of the stalled housing projects. The completion of
inventory will lead to higher affordability as the supply in market increases.

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 4. Role of Financial Institutions in Promotion of Affordable Housing
To understand this, let see the life cycle of real estate project and funding cycle from Equity and Debt
by Bank and NBFC.

From the above it can be seen that the

project life cycle of a housing project
from land acquisition to hand over of
units has increased considerably in the
last few years affecting the affordable
housing development.

To accelerate the development of

Affordable housing, reforms are
required in clearance mechanisms.

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Real Estate Sector – Area of Stress for the financial Sector
Against the background of a slowdown in the economy and the numerous challenges in the financial
sector which have not yet settled, any signs of adversity can result in panic reaction.

Following a series of reforms which came in the form of demonetisation, Goods and Services Tax
(GST) and Real Estate (Regulation and Development) Act (RERA), the real state sector has faced
headwinds with the financial side being affected quite noticeably.

The sector works on high cost borrowing as discussed before and the formal sector which gets
involved are banks and non-banking finance companies (NBFCs).

Bank has inherent restrictions on lending to real estate as it gets classified as a sensitive sector.
NBFCs, on the other hand, tend to be preferred for access and have done fairly good job in providing
the necessary funding.

Developers have traditionally been using informal sources along with credit from the NBFCs for
financing property development.

Funds from individual homeowner’s installments are used to meet the phased requirements of
construction. However, with formalisation of the economy and RERA there have been several
regulatory measures that have brought in discipline but also put pressure on their finances.

Post-demonetisation, the NBFCs took over with some aggressive lending which was also seen in the
growth in credit to this sector

Bank exposure to real estate as of March 2019 was Rs 2.2 lakh crore, but overall credit to the NBFCs
stood at Rs 6.8 lakh crore. Hence there was a re-routing of some credit from banks to the NBFCs to
real estate. However, real estate exposure to NBFCs was not really high at 6 percent of the
outstanding credit

Two factors have affected the real estate sector of late:

1. the economic slowdown which has affected the corporate sector performance which in turn has
affected demand for property. this has led to the build-up of inventory that has been funded
through loans by the financial sector which is primarily banks and the NBFCs
2. The second relates to the NBFC crisis that began in September 2018 and led to a contagion
which has only of late been brought under control.

Both of these factors have meant that this sector has been under pressure.

There are hence three distinct pictures on the real estate sector today.

• First, for the first quarter of the year, the performance has been impressive.
• Second, from the ratings perspective, there have been more downgrades (which is not default
but a change in rating to a lower level) than upgrades, which is indicative of signs of stress.
• Third, there is the physical market which does not look good on the commercial side especially
given the inventory build-up and limited demand for new property.

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 The relatively low share of real estate in overall loans for banks (2.5 percent) and NBFCs (7 percent),
there does not appear to be any imminent problem for the system as such.

Presently, the non-performing asset (NPA) ratio for NBFCs is 6.6 percent (RBI: FSR, June 2019) which
is manageable though there has been a call to revisit these numbers in the face of the crisis. Bank
NPAs to the service sector (which include NBFCs) was 5.7 percent.

The future course of the performance of the real estate sector would be dependent on how the
economy fares and how soon the recovery sets in. The present focus on housing – both affordable
and regular — has provided relief to the sector and brought about some flexibility which would
otherwise not have been there. Both corporate expansion and retail growth would hold the clue to
commercial real estate prospects.

The realization of the vision of ‘homes for all by 2022’ requires conducive macro-economic
environment, proper land acquisition, infrastructural planning, effective delivery mechanisms,
appropriate funding sources, synchronized action by various stake holders ie Private developers, govt
representative and the finance community together with judicious micromanagement. These factors
would help to achieve the global benchmarks in terms of investment, development and joint ventures.
Since the housing sector provides a relative safe recourse for finance credit because of the lower
default rate, banks and NBFC must continue to stress this as a focal lending area.

Some of the area to be worked on by Government

• Stronger implementation of RERA provisions

• Streamlining approval mechanism & reducing project lifecycle at initial stages
• Streamlining Development Control regulations, thus bringing in uniformity
• Provide direct support to private developer or include them in the govt. housing program
• Popularize housing loan further by providing tax incentives

Some of the are to be worked by RBI

• RBI need to strengthen micro finance penetration in sector and help improve credit access
• Educate household (LIC and EWS) abt credit facilities and way to utilize
• Tie-up with developers to extend long term funding and reduce project risk
• Improve the credit appraisal mechanism for both household and developer to reduce defaults
• Increase allocation to real estate sector

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