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Posted: 2016-06-22 08:52:01 by smarthomes

How Viable is the Vision of the Central Government Seeking Housing for all by 2022?

How viable is the vision of the central government seeking housing for all by 2022? Would it be a cakewalk for the new government or one demanding major changes in the entire framework? Let’s take a peek into it and attempt ascertaining the challenges and possible solutions.

Real Estate housing Scenario today

The urban housing scenario in current times looks far from promising. With more than 100 million homes required by the year 2022 of which 19 million is the current deficit mostly amongst the Economically Weaker Section of the society who can barely afford to invest Rs. 15 lacs to own a house of their own, the situation does not look very bright. Currently 0.9 million homes are lying vacant to be rented for unknown reasons, which if can be filled in would save the government from provisioning that number of additional housing.

Of the 100 million homes, 90% requirement is that in urban areas of which 40 percent are required in social housing segment, 30 percent in LIG , 20 percent in MIG and balance 10 percent in the premium category of housing. To achieve the same, it is imperative for the Real Estate industry to grow at the rate of 18 -20 percent annually post adjusting 6 percent inflation. This is far superior to the current annual growth rate of 12-13 percent.

The current contribution of real estate to India’s GDP is a mere 6 percent with annual investment in the sector amounting to USD 130 billion. The gap between funds required by builders and that available through government, banks and alternate sources is huge and there is a liquidity crunch in this sector, a sector which is bound to contribute to 8% of the GDP to sustain government’s vision.

Challenges faced

The average gestation period of a housing project is seven to eight years while most of the current funding provisions are for four to five years. 20 to 40 percent of the house cost attributes to the land cost which also extends up to 60 percent in metropolitan cities. The irony however remains that none of the banks or alternate sources are willing to fund land cost and lending only comes into picture with the construction bit.

Weak government spending in this sector contribute to only 3 percent of the total government expenditure of which majority is invested in rural housing leaving insignificant allowances for urban housing development. The current balance sheet of the bank also shows a meager share of 4 percent contribution of total advances towards housing sector which is insufficient by a large extent. The 2009 global financial crisis has also discouraged private equity funds to invest in Indian Inc. thus witnessing reduced equity flow in the real estate sector year on year. Earlier the household savings contributed to almost three quarter of the real estate investments of India while in the recent years a major dip has been seen in this also mainly on account of rising cost of construction, unemployment issues and economic instability.

As per KPMG research, the fund required for fulfilling the vision of housing for all by 2022 is a stupendous amount of USD 2.3 trillion, making it an annual investment of USD 260 billion. We are currently facing a 50 percent deficit with current investments amounting to USD 130 billion. The USD 2.3 trillion quoted is for development of houses only; leave alone the cost to be incurred for supporting infrastructure, water, sewerage and similar facilities bringing the total to USD 3-4 trillion.
Inadequate reforms, high commercial rates, limits on External Commercial Borrowings (ECB’s) also remain major challenges to this project.

Possible Solutions

Government has recently introduced mechanisms to lend longer term loans to the builders extending to the gestation period of the project providing some relief to the sector. A possible step would also be to extend the limit of ECB’s from USD 1 billion to USD 10 billion releasing liquidity into the system. It is also noticed that banks are more willing to lend to home owners rather than builders. A startling ratio of 78:22 depicting loans to home owners against commercial loans to builders says it all. This needs to be changed rapidly through newer instruments and reforms.

To handle the concern of non-funding of land, a Joint Development Agreement (JDA) can now be worked on between the builder and land owner through which they can share the economic risk and reward in agreeable proportions. The commercial and taxation issues in such JDA are however very sensitive and should be elaborated, understood and documented in an efficient manner to save disputes in future.

Reforming or amending the Rent Control Act can also is a possible measure to provide much needed boost to the sector. As per 2011 data, the rental stock in India's only 11 percent, however due to rapid urbanization the ideal figure should be at 30-40 percent. On the approval front, approvals related to housing development are twice as much compared to other countries consuming a span of 2-3 years over 34 varied permissions. A newer and refined policy should be drafted to streamline this mechanism.

With stable currency, relaxed FDI norms and strengthened economy, it is relatively easier for the government to attract foreign capital into housing sector through private equity funds. Also the household savings should be focused more on investment in housing and low on Gold which is also causing a burden on countries Forex reserves. These can be achieved through better taxation with benefits on under construction properties also and reduction in indirect taxes which raises the cost of homes by 35% making them very expensive.

Having analyzed the challenges and possibilities, the dream of housing for all is not an impossible one given our government is willing to leave no stone unturned.
Source: KPMG


About: Meenakshi Khurana is the Director Client Relations, Sales and Marketing with Smart Homes Infrastructure (P) Ltd. Smart Homes Infrastructure (P) Ltd is a subsidiary of Smart Infrastructure Pte Ltd.

Smart Homes is a professionally managed young organization that specializes in affordable Group Housing and Town Planning Projects in India and plans to build more than 100,000 homes in next decade. Smart Homes has a Team that has over 200 man years of experience in development of apartments in group housing projects and the team has the experience of selling more than 80 million square feet of housing projects across India.

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