Financing the Urban Affordable Housing Dream
Housing Need Gap
A demographic trend suggests that India is on the verge of large scale urbanisation (61 cr people by 2031 as per ICC report i.e. 40% from current 31%) over the next few decades with more migration, greater growth in population in existing urban areas and reclassification of settlements into urban areas. This coupled with growing number of nuclear families, indicates a huge need for affordable housing. Particularly the LIG and EWS segments account for over 95% of housing shortage in urban India.
Housing, a basic need, is facing challenges such as high gestation period of housing projects, limited and expensive capital, spiraling land and construction cost, high fees and taxes, unfavorable development norms and low affordability by Economically Weaker Section (EWS) and Lower Income Group (LIG) households. The central governments housing for all vision 2022 would require development of about 11 crore (refer table 1) housing units over next 7 years with investments of over USD 2 trillion. Given that on an average urban housing costs 3–4 times a rural housing unit of similar area, most of the investment in housing would be needed for EWS/LIG households in urban areas.
It is expected that 70 percent of the housing needs until 2022 would be concentrated in just nine states These states are Uttar Pradesh, Bihar, Maharashtra, West Bengal, Madhya Pradesh, Andhra Pradesh (including Telangana), Rajasthan, Tamil Nadu, and Karnataka (Source: KPMG Report : Decoding housing for all by 2022.)
What is Affordable Housing
There is no standardized definition of what affordable housing is as interpretations vary depending on stakeholders
· Task Force on Affordable Housing — 21–27 sq mtrs carper area for EWS and 28–40 sqmtrs carpet area for LIG. On a household income basis, it would mean a annual income of Rs 1 lac and Rs 2 lac for EWS and LIG respectively with a thumb rule that house value should be 5 times annual income
· RBI — affordable housing is defined from the perspective of priority sector eligibility for banks basis loan amount and value of house. Housing loans to individuals up to Rs. 50 lakhs for houses of values upto Rs. 65 lakhs located in the six metros viz. Mumbai, New Delhi, Chennai, Kolkata, Bengaluru and Hyderabad and Rs. 40 lakhs for houses of values upto Rs. 50 lakhs in other centres for purchase/construction of dwelling unit per family are classified as affordable.
· Banks and Housing finance companies- define affordable housing loan from size of project and value of each unit and monthly EMI for the loan.
· Developers — on the basis of unit value (< 50 lacs in metros and < 30 lacs in other tier 2–6 cities) and margins (project IRR of max 35–40%)
However, there is general convergence on the target segment and type of units and price points as well as the fact that it should within the economic potential of the target segment in terms of share of spend as percentage of monthly income.
Supply Constraints for Urban Affordable Housing
Pricing Beyond Reach of Target Segment
High Cost of land and escalating labour and capital costs have resulted in un-viability of construction of EWS or LIG units in terms of affordability for the end buyers. Even assuming with a moderate profit margin of 40% by the developer on land and constructions costs, the effective selling price in suburbs of MMR or NCR comes to Rs 2800–4000/sqft which translates to a cost of Rs 15 lacs to Rs 20 lacs for a 500 sqft unit. This price point is out of reach of many low income buyers.
It has also been observed that a successful affordable housing project ends up driving the prices in that and surrounding areas thereby making new projects out of the reach of LIG and EWS segments. Mumbais suburbs have experienced this phenomenon where the property prices in areas like Badlapur, Dahisar, Karjat and Palghar (which had several affordable housing projects completed) have appreciated by over 60–70% in last 3 years as compared to a 20% appreciation in other areas.
Financing of affordable housing faces constraints on the
a) demand side (eligibility of loans to the buyers from EWS and LIG segment who are largely self employed or don’t have organized sector jobs with pay slips) and
b) supply side — equity and debt funding for construction of affordable housing projects
Demand side financing
Salaried individuals in LIG and MIG segments have access to timely and reasonable priced housing loans given low levels of delinquencies in housing finance. However, the self employed and small business segment faces the biggest challenges. While there has been increased focus by lenders on financing the non salaried segment, they face critical challenges in terms of income assessment, KYC documentation as well as banking habits and EMI as % of monthly income. Moreover lenders tend to target economies of scale and hence the average ticket size of loans is at the higher end of the LIG spectrum with largest volumes in suburbs of metros and Tier 1 and Tier 2 cities.
At the same time, given lack of flexibility in lending norms, private banks (except large ones like ICICI and HDFC) to a large extent focus on portfolio purchases from housing finance companies which are more aggressive in the affordable housing market. This is primarily done to meet their PSL targets. RBI data indicates that as on November 2016, gross housing loan (including Priority Sector housing loan) (refer Table 2) by Scheduled Commercial Banks recorded a growth of 15% from a year ago and the growth rates have fallen largely given the balance sheet issues faced by most PSU banks. While impressive considering the overall credit growth during this period, it is pertinent to understand that it’s still a fraction of the required amount and also largely concentrated in the MIG , HIG and luxury segment as indicated by the fact that 44% (PY- 49%) of housing loans by scheduled banks as on Nov 2016 are PSL compliant. Moreover of these PSL compliant loans, over 90% would be to the salaried segment in suburbs of metros and Tier 1 cities and at the upper end of the PSL cut offs. The growth in PSL compliant housing loans by scheduled banks has been only around 6% indicating that truly affordable mortgage finance is being done mainly by Housing Finance Companies (HFCs).
Also the top 5 lenders incl HDFC, LIC Hsg, SBI, ICICI , DHFL and Indiabulls Hsg contribute to 90% of home loans being given indicating very low participation by other banks. Even the average ticket size of these largest lenders (Table 3) is significantly higher than the governments threshold for EWS and LIG segments and has been increasing annually for last 3 years.
However some recent developments on regulatory and policy front are expected to boost demand side financing for affordable housing
- HFCs access to financing will increase as well as get cheaper due to recent guidelines by RBI , SEBI and IRDA. RBI has reduced risk weightage of exposure to AAA HFCs to 20% from 100% earlier. SEBI has increased sectoral caps to better rated HFCs (for Mutual funds investing in HFC paper) by 5% i.e. effectively to 35%. IRDA has exempted AAA rated HFCs (i.e LIC Hsg, Indiabulls & HDFC) from sector caps for exposure taken by Insurance companies. This will enable the larger HFCs and SBI & ICICI to reduce home loan rates further as well aggressively target loan book growth.
- Home Loan amount eligible for subsidy under Pradhan Mantri Awas yojana has increased to Rs 12 lacs and effective interest rates after tax and subsidy benefit is under 3% which is expected to provide a huge fillip for offtake of affordable housing loans and hence movement of inventory of affordable housing units
Supply side financing — Construction finance for Affordable Housing Projects
While financing costs may constitute max 15% of overall cost of construction for affordable housing projects timely and insufficient financing leads to delays /non completion or cost overruns in projects leading to widening of the demand supply gap. Most affordable housing projects especially in urban and semi-urban areas are in form of SRA schemes or by Category B and C developers with housing projects of < 50 units which does not generate scale and sufficient supply. Banks are extremely selective and wary about real estate lending and the sanction processes are also lengthy. Moreover the category B and C developers are anyways not target segments of most banks and HFCs from a lending perspective, leaving them at the mercy of the informal lending market with rates between 24–36% p.a. which distorts viability and leads to increase in prices of units.
Several regulatory dispensations to boost the sector haven’t had the desired impact as indicated by below table
Table 5 indicates that Bank exposure to Commercial Real Estate i.e. developers has been growing at an average of 7–8% over last 3 years before 2016, but has fallen to 3% for period between Nov 15- Nov 16 indicating that projects are being under financed or developers are resorting to other high costs borrowings incl from NBFCs and Real Estate Funds or Private Equity.
The level of annual investments in the housing sector is about USD 110 to 120 billion (5–6% of total GDP). (Source: KPMG Report: Decoding housing for all by 2022), however over 70% of this in value terms has been focused in the commercial (office space and retail) and residential segments (MIG and above). This has created a huge unmet fund flow demand in the LIG and EWS segments from a project funding perspective.
FDI in real estate has also slowed significantly despite relaxation is norms on project size (20,000 sqmtr from 50,000 sqmtr) due to slow moving inventory in metros and cities partly due to purchasing power of the mass segments and high level of interest rates which have restricted loan based housing purchase.
The investments required to meet the current shortfall of 11 cr houses is 2 housing for all vision (i.e. 11 cr new units ) is about USD 2 trillion. This translates to about USD 250 to 260 billion annually for the next 7 years, more than double the annual investments witnessed in FY14. While raising such financing in current macro- economic scenario of risk averseness and rising interest rates in USA, it is also pertinent that we need significant financial sector reforms and a double digit GDP growth rate to absorb high levels of foreign investments and external debt without distorting the targeted inflation and currency levels.
However, the 2017–18 Budge has given renewed focus to the sector. Affordable Housing has been provided Infrastructure status and incentives like 100% tax exemption to affordable housing construction companies has been extended as well as service tax on construction of such houses has been exempted.
Impact of Real Estate Regulatory Bill
The Real Estate Regulatory Bill , passed in Parliament last year and expected to be notified by various states soon would act as a great facilitator for affordable housing. Key provisions like accountability of developers and rights of consumers, dispute resolution and escrow mechanism for end use of customer payments would provide greater confidence to lenders on project completion and saleability. Thus, if the perceived value of the collateral (a house under construction) improves, the informal income segment stands a greater chance of getting access to formal financing from banks and HFCs. Similarly developers would ensure timely completion of projects and achieve faster churn of inventory
Apart from approvals and land costs which distort pricing, access to finance to both buyers and developers is a serious challenge which needs to be addressed comprehensively. Challenges of Urban affordable housing get exacerbated due to cost escalations as a result of complex approvals , restricted FSI and higher cost of land and labour and low access to credit to category B developers and informal income buyers . Some possible measures are
· Mandatory sub targets for affordable housing in overall PSL targets for banks
· Introduction of mandatory % of affordable housing loans in incremental disbursements for housing finance companies by their regulator the NHB
· The 20% cap on non individual housing loans in place for HFCs to be relaxed to 30% with the incremental entirely reserved for affordable housing projects
· NHB to provide refinance to HFCs and also directly to developers with sound background and track record for affordable housing.
· Banks and HFCs to be encouraged to lend more to non salaried segment for lower ticket sizes (less than 10 lacs) and medium tenors (10 years) and low LTVs (50%) and a credit history on the lines of MFI customers needs to be created.
· Increase the role of mortgage guarantee companies to widen risk distribution so that banks and HFCs can scale up their lending
.Create new models for financing through PPP basis where buyers pay the City/town Development Authority the purchase price of the units over a 30 year period through EMIs (after which the ownership is transferred free). No resale is allowed for 5 years and after that the development authority gets 80% of then prevailing market value for transferring of rights to the new buyer in case of resale. The monthly payments are escrowed to a account from where the private party is paid its returns (on that basis the private party can raised financing , like toll road financing). Development authority ensures all approvals and takes a 10% stake in every project