Rift in India’s budget housing spread

Along with PS Jayakumar, former consumer banking head of Citibank, he founded VBHC Value Homes Pvt Ltd in July 2008. He had said that this firm will build such houses, which will cost less than this. 20 lakhs – This will revolutionize the residential real estate market where big developers and costly projects ruled.

The idea was, as expected, met with skepticism. An interviewer asked Rao, “How has anyone else entered space?” Once an optimist and outspoken, Rao hit back: “Why didn’t anyone make low-cost detergent before Nirma?”

Other developers soon followed in Rao’s footsteps. Some managed to start their projects even before the arrival of VBHC.

The timing seemed fine. The financial crisis of 2009–2010, following the collapse of Lehman Brothers, dampened the enthusiasm of previous years when prices hit the ceiling and middle-class home buyers suddenly had nothing to buy. Large developers saw a drop in sales. His capital dried up. ‘Affordable housing’ has entered the lexicon of government and private sector.

For more than a decade, affordable housing continues to nest in government schemes, but is rapidly vaporizing away from the private sector.

Most private affordable housing firms like VBHC could not expand; High material costs, delays and land costs became bottlenecks. Ultimately, they had to raise prices due to compound inflation. While the value of homes is under In metros, 45 lakh or people with a carpet area of ​​60 square meters or less are termed ‘affordable’ by the government, the definition of the private sector has shifted upwards. The dream of a cheap house has been shattered.

Anarock Property Consultants, a real estate consultancy, still brackets the sub-but-affordable homes. 40 lakhs; on the middle section 40-80 lakhs; and premium at 80 lakh- 1.5 crores. Of the 2.37 lakh homes launched in India’s top seven cities in 2021, over 63% were in the mid and premium segments. Affordable supply share declined to 26%. In 2019, before the pandemic, the supply share of affordable homes was as high as 40%.

In January-March 2022, the mid-segment was again dominated by new supply with a 35% share. The premium and affordable segments each accounted for 25%, while the rest of the pie was occupied by the luxury segment.

“Demand (for low-cost housing) is still high but the problem is the cost structure, especially the time delayed interest and lengthy project approvals. Edges become thinner. Financing is another issue. Home loans for premium projects are easy,” says Jerry Rao.

Developers complain that today, it’s easier to get approval faster to 5 crore villas 15 lakh houses.

the lure of the beach

Affordable housing players of a decade ago now have more edited dreams. And ‘mid-market’ is a popular term.

VBHC scaled down its pan-India plans to focus only on the Bengaluru and Mumbai metropolitan area. The company is also diversifying to undertake redevelopment projects, plan sales and manufacture affordable yet aspirational products such as row houses. It currently makes house in 20-50 lakh price range.

“Affordable housing is a complex market. The cost of mid-market and affordable is the same, which is why many developers have moved upwards,” explains Rao. “It’s a struggle and we have to keep rethinking the business situation.”

Soon after Tata Motors Limited launched the Nano, which was touted as the world’s cheapest car, in 2009, Tata Housing Development Company Limited launched the small car. 4-8 lakh houses under Shubh Griha brand in Boisar, a far suburb of Mumbai. The project was a runaway hit.

Tata Realty and Infrastructure Limited (TRIL), which now houses all the residential and commercial projects of the Tata Group, has over time changed track to focus on premium and will be referred to as ‘aspirational, affordable homes’ under its New Haven brand. it is said. their price 40 lakhs or more. “The focus has been on premium and luxury housing projects with enhanced lifestyles after the pandemic. “We also have a large commercial office portfolio,” says Sanjay Dutt, chief executive officer (CEO) and managing director (MD) of TRIL.

Dutt says that a budget housing project requires affordable land (less than 500 per sq. ft. FSI or floor space index) and the construction cost is not over 1,500 per sq. ft. With increased cost and cost of capital due to extended project timelines, expenses can add up substantially. “The biggest competition for affordable homes is in mid-segment homes because the cost dynamics are understandable,” he says.

Developers say the profitability in affordable housing is almost half of what they earn from the mid-market segment and a third compared to luxury housing. Rising input costs have dealt yet another blow to affordable housing after the pandemic.

“The demand for cheaper remains but higher inputs and manufacturing cost are driving up the prices. We will continue to do affordable, but will focus more on the mid-market,” said M Murali, President and MD, Shriram Properties Ltd, which is known for its affordable homes. 50 lakhs.

At their budget housing project in Ettibele, Bangalore, where homes were previously sold 30-32 lakhs, with the units costing in the second phase, the prices will see an increase of around 20% 40-42 lakhs.

From a risk-reward standpoint, mid-income housing looks more attractive, and carries better sales velocity and margins, said Sharad Mittal, CEO, Motilal Oswal Real Estate, which manages real estate funds.

“downstairs house 4,000 per sq. ft. is a low-cost segment, with a social housing angle that requires a different mindset, though the demand is very high. “Buyers also face challenges with obtaining mortgages. We primarily finance projects with homes 4,000-7,000 square foot range, and selectable below 4,000 per sq. ft. Developers today are choosing projects that assure better returns,” Mittal said.

In a tough real estate market, large developers were eager to expand their customer base and cater to home buyers across price segments by lowering their entry prices. However, when the market is on an uptrend, developers want to take advantage of demand and market projects with better margins.

Meanwhile, the pandemic may also have changed buying patterns – those who can afford the cost are preferring larger venues. Shriram Properties is seeing a boom in its mid-market portfolio, which is priced at . is between 50 lakh and 1 crore. Its portfolio includes both apartments and plots.

high volume condition

While many private developers have put off the affordable housing dream, a handful still see a business case. Demand for budget homes remains strong. However, developers need to work harder across the supply-chain to gain control over costs and margins.

Mahindra Lifespace Developers Ltd, which sells value homes under the Mahindra Happinest brand, launched three projects during the pandemic. Even though the firm raised prices to offset the cost of inflation in its second project in Kalyan, a distant suburb in Mumbai, demand remained strong. One bedroom homes sell for a higher price 35 lakhs for above and two bedroom house 55 lakhs.

“sub- Fewer than 50 lakh segments in metros are served by organized or corporate developers. Many dipped their toes and then retreated to a higher section. We see this as an opportunity. There is a strong demand for a brand like Mahindra. Arvind Subramaniam, MD and CEO, Mahindra Lifespace says, “Building affordable housing in India is a challenge, but we are committed to it. We will buy land in four years where we can exit the project and exit. Volume launches. We sell almost everything at launch. The cash flow is used to complete projects, and the turnaround is quicker,” he says.

Delhi-based Signature Global is another company that has a stronghold in the affordable segment. It aims to launch 10 projects in 2022-23, with a target of 3,500 crore pre-sales. Last year, the company almost 2,500 crore in pre-sales.

“We do not compromise on quality. “Profit margins may be relatively low (in budget houses), but we can get a margin of 15% on higher volumes, which other developers find difficult,” says Pradeep Agarwal, Founder and President, Signature Global.

Ram Wallace, MD and CEO, VBHC, says the pace of sales after the pandemic has been steady, at par with pre-Covid levels, which are 70-80 units per month. The company had land at Oragadam (near Chennai) and Neemrana (in Rajasthan). Here it has launched plots and sold well. Affordable row houses, redevelopment projects in Mumbai and Thane and group housing projects in Panvel, Navi Mumbai and Bengaluru are next in line.

“Input cost has gone up. However, at present, we cannot take a price hike for customers. There’s a sweet spot for sales 4,000-5,000 per sq. ft. Anything less is a challenge. We want to build homes close to cities but along transportation corridors like the metro,” Wallace says.

PMAY Factor

So, what’s up with the government’s affordable housing push?

India’s ‘Housing for All’ mission was announced in 2015 with an initial goal of providing shelter to every Indian by the end of 2022. Pradhan Mantri Awas Yojana (PMAY) is the flagship scheme targeting both urban and rural areas.

The houses under PMAY-Urban are 60 square meters in metros and 90 square meters in non-metropolitan cities. For the economically weaker section, the size of the house is limited to 30 square metres, with some scope for flexibility.

The Ministry of Housing and Urban Affairs has approved 1.22 crore houses for PMAY-Urban. As on 31 March 2022, 97.02 lakh such houses have been ‘grounded’. Out of this, only 56.35 lakh have been completed so far. ‘Grounded’ refers to instances where construction has begun and includes the number of homes completed. 2.29 crore houses have been sanctioned for rural areas while 1.77 crore have been completed.

In the last seven years, the government has taken several incentives and regulatory measures to promote this affordable housing. These include reduction in the Goods and Services Tax (GST) on affordable housing and the state of the art infrastructure to enable cheap credit through priority sector lending.

However, some demand-boosting incentives – such as income tax exemptions and subsidies on home loans for middle- and lower-income groups – lapsed in 2021-22.

In this year’s budget, the government decided not to extend these incentives to home buyers. Instead, it announced the allocation 48,000 crore for PMAY with a target of completing 80 lakh houses in 2022-23.

“Last year, we had doubts whether the targets would be met and the required funds would be available. Although the target will not be met in 2022, the budget has bridged the funding gap by 50%. “The number of completed units is increasing and things are progressing well,” says Kapil Banga, assistant vice president and sector head, credit rating agency ICRA Ltd.

The policy thrust appears to be shifting towards long-standing issues – such as ease of doing business – that directly affect on-time delivery. This is an encouraging sign.

Finance Minister Nirmala Sitharaman, in her budget speech on January 1, said, “Central government to reduce the time required for all land and construction clearances, to promote affordable housing for the middle class and economically weaker sections in urban areas.” Will work with state governments.” February. “We will also work with financial sector regulators to increase access to capital while also reducing the cost of arbitrage,” she said.