As per rough estimates, the Indian housing market is short of as many as 19 million homes. That’s a lot better than the figure of 24 million that held true just five years ago. After the obvious deficit of affordable housing for the LIG and EWS groups, what is most striking is the low availability of budget housing projects that fall in the price range of Rs. 40-55 lakh in urban areas. This is the budget range that pertains to the largest part of the rapidly growing Indian middle class.
It is high time that the Indian residential real estate sector focuses more on the supply of budget homes. Indian developers tend to focus only on housing for the higher income groups whenever there is an uptick in the economy. The demand has supply trends for the last decade have thus been anything but supportive to the cause of affordable housing for the Indian middle class. It is no accident that the mid-income housing segment is the most important customer base of housing finance companies.
A vital step in fast-pacing the budget housing pipeline is to ensure more encouraging institutional funding. With the potential rate of return being as high as 25%, investment into budget housing projects offers excellent incentives for institutional funders. However, given India’s abysmal track record for transparency in the past, such funds will always seek the security and sustainability of developers having a good reputation.
The challenges for budget housing
While there is huge demand and opportunity attached to budget housing projects, they also come with a unique set of challenges. For one, there is the ongoing lack of speed in project approval process. Though much has been promised by the Government on this front, the fact is that there is still a huge bottleneck of pending approval for housing projects. Also, most of our larger cities suffer from a lack of good support infrastructure in emerging locations.
In fact, building infrastructure to connect adjacent geographies to the prime city centres is by far the most viable solution to accommodating a proliferating population. The reason for the snail’s pace at which support infrastructure is being deployed in emerging locations is the fact that it is a time-consuming process. City planners must undertake detailed feasibility studies before launching large infrastructure projects.
We have seen that major infrastructure projects in India take anywhere between 5-15 years to complete. Nevertheless, building infrastructure in peripheral locations is the primary tool in the hands of our city planning authorities to ensure that more citizens have access to budget housing.
Developing roads to connect adjacent geographies to the prime city centres is by far the most logical and sustainable way to ensure the holistic growth of a city, and to keep real estate costs within the reach of the middle class.
In some cases, city planning authorities have indeed been proactive in fast-tracking such vital road infrastructure. In Pune, the upcoming Ring Road will inter-connect key thoroughfares like the Pune-Nashik, Mumbai-Pune-Solapur, Pune-Ahmednagar and Pune-Satara highways and decongest traffic loads on the roads connecting Pune and the Pimpri Chinchwad Municipal Corporation (PCMC). As a result, areas such as Charoli (which already benefits from its proximity to Pune Airport, Nagar Road and the manufacturing and IT hubs of the city) have become the new havens for budget housing seekers.
Another hurdle on the road to better budget housing availability is the presence of too many fly-by-night players in this segment – it tends to discourage large-scale FDI funding. This has been the top reason why institutional funding requires so much time to identify its preferred plays in the Indian budget housing market. Also, the profit margins have been and will remain thin in projects where developers limit themselves to a small number of units.
Significant returns on investment in budget housing are only available in projects with a sufficiently large number of units. Such projects require the financial and technical abilities of large national players. This is the primary reason why massive integrated townships with an adequate supply of budget housing see the maximum investment from foreign investors and funds.
Large integrated townships bring another key to deciphering the budget housing problem to the table – they help reduce the impact of high land prices on end-users. While developers of smaller projects must spread this cost over a much smaller number of buyers, developers of large integrated townships are able to pass on the economies of scale to their buyers and simultaneously provide superior amenities and more green open spaces.