In the last couple of years, affordable housing is the only segment where transactions have happened in real estate,according to Pradeep Aggarwal,Chairman of the National Council on Affordable Housing, ASSOCHAM. In this interview first published by livemint.com ,he talks about why the segment is getting traction and its prospects.
Overall, the real estate market is witnessing subdued demand since the last few years, but the affordable housing segment is getting some traction. Why is that?
There are various reasons why the real estate market is in such a situation since the last 5-6 years, but the most important factors that affected the real estate sector was absence of a regulator and mismatch in demand and supply. In any unregulated industry, it is easier to take things for granted and this has backfired in real estate. Besides, mismatch between demand and supply and decline in speculation-driven demand impacted sales. Now there are no speculators because those unrealistic price escalations are not possible anymore.
As far as affordable housing is concerned, you need to understand that 95% of the country’s population consists of the lower middle class or economically weaker section. These sections are driving demand in affordable housing. Moreover, in the past few years, the government’s focus and incentives to developers as well as homebuyers was why demand in the segment went up. I look at affordable housing from a different perspective; it is not just real estate, it is the need of the masses.
In the true sense, the real estate market is now emerging in a different manner and in the next 10 years, it will see a turnaround. The premium segment will also see demand, but affordable housing will drive the sector.
If I talk about numbers, as per the industry report, affordable housing witnessed a growth of 22% in sales during 2018. Even this number is not big because there are few developers in this segment at present. Demand is huge and supply is limited. Once more developers start offering projects in this segment, it will witness tremendous growth.
If there is such robust demand, why are more developers not venturing into this segment?
Let me try to explain it through an example. Ten years ago, many people—even the industry—was reluctant to adopt digital banking or online shopping. But things changed over a period of time. Now the business depends on volume rather than margin and everyone is now convinced that to enhance business, digitisation is important in the retail industry. Similarly, in the real estate sector, developers in the mid or premier housing segment were used to a profit margin upwards of 25-30%, whereas affordable housing segment can offer a margin of around 10% only. It is very difficult for them to do business at a lower margin. But they need to understand that here we have volume; margin is low but volume is high.
Besides, most established developers already have many under-construction or completed projects which they sold at a higher rate of ₹5,000 or ₹6,000 and above per sq. ft, now they don’t want to get into a segment where price points are around ₹3,000 per sq. ft. It would be difficult for them to justify the same.
Who are the real buyers of affordable housing? Are they only end-users or investors too?
It is difficult to segregate the buyers. But about 70% of the buyers in this segment are salaried individuals. This salaried class, I suppose, is buying it either for own use or may opt to rent it out later. I don’t think there are any speculators in this segment, because if I talk about Haryana government’s affordable housing policy, there are restrictions on transfer of property till the buyer gets possession and even a year after that. I consider them as end users or serious investors, and not someone buying for speculation.
The other category of buyers is self employed (10%) and a mix of senior citizens and millennials and others having a low budget (20%).
However, many people are considering affordable housing as an investment opportunity because of various reasons such as price difference—there is a cap fixed by the government on the per sq. ft rate that a developer can charge under the affordable housing scheme, other projects in the same vicinity will cost you at least 25-30% more. So someone buying an apartment in affordable housing projects will simply save 30% or in other words make a return of 30% straightforward while buying the property. Price appreciation over the years will be additional. Other factors that buyers consider are quality, size of apartments and specification of projects that are defined and monitored by the government, developers can’t manipulate them. There is strict deadline to complete and provide possession. Besides, the small ticket size makes it more marketable. So all the mentioned factors makes affordable housing more promising compared to any other real estate segments. It’s a win-win situation for both home buyers as well as investors.
What is your overall perception on the real estate market?
New launches have almost stopped in the premier housing segment in the last few years because there is already a lot of inventory in this segment and demand is less. So I believe given low demand, developers will focus only on clearing the inventory in 2019 and even in 2020. So, the next two years will continue to remain tough for developers in the premier segment. However, as I mentioned earlier, affordable housing will do well for a long period as there is very less supply and high demand.
NBFC crisis can impact affordable housing
How has the recent liquidity crunch owing to the NBFC (non-banking financial companies) crisis impacted or will impact the affordable housing segment?
No doubt both developers and home-buyers got impacted because of the NBFC crisis. While home-buyers have other options to avail loans, for a developer, in the present scenario, it is difficult to obtain loans from sources other than NBFC. The government should step in and strengthen the NBFC model otherwise it will be a major setback for the affordable housing segment.
The government should also consider putting affordable housing in the list of priority sector lending for banks as well as other financial institutions. Easy availability of loan will boost the sector and make it more feasible for developers to enter it.
The government should also work on the approval process for affordable housing. There should be a separate department and procedure for approvals and clearances, and we should get approvals in a time-bound manner. Margins are very thin in this segment and any delay can impact the financial feasibility of projects.