Developers who want to enter India’s affordable housing market face many obstacles. But with an estimated market value of USD 245 billion, the sector is attracting growing interest. Tata Housing, one of India’s fastest growing real-estate developers, is among a new generation of firms focusing on the low-income segment. Nonetheless, to achieve the sector’s enormous potential, the Indian government will need to create a facilitating environment.

India’s urban population grew by 32% in the decade leading up to 2011, rising from 285 million to 377 million, out of the current total population of 1.2 billion. The housing sector has not kept up with this growing urbanisation, resulting in millions of families living in slums and a huge gap between the demand and supply of homes. The government, which estimates that there is a shortage of more than 18 million homes, is increasingly looking to the private sector to address the needs of low-income population. It is taking action at central, state, and local levels to try and overcome the myriad of obstacles faced by the affordable housing sector and create an enabling environment. India’s real-estate market and its home loan sector traditionally focus on the higher-income segment. The estimated 22 million households in the low-income bracket have remained largely unserved. However, with an estimated market value of USD 245 billion, this segment is attracting growing interest from the private sector (Monitor Deloitte, 2013). Tata Housing, one of India’s fastest growing real-estate developers, is among a new generation of firms focusing on the low-income population. In 2010, it created a dedicated subsidiary, Smart Value Homes Limited now Tata Value Homes Ltd (TVHL), to cater to this segment offering homes ranging in price from INR 40 000 (USD 640) to INR 100 000 (USD 1 600). TVHL has seven ongoing projects under two brands, Shubh Griha and New Haven in Mumbai, Ahmedabad, Bengaluru, Chennai and Pune.

A business model tailored to the low-income segment

To provide low-income housing, Tata has developed a specific business model. Success in this sector depends on low prices, reduced production costs, a standardized range of products and a determination to prove that low cost does not mean low quality. The first major obstacle in India is finding land, which is available in only limited quantities in urban areas and which can rise in price by as much as 20–30% a year. Another constraint is the lack of infrastructure – public transport, sewage treatment, water and power supplies etc. – in the targeted areas, which usually makes it unviable for a developer to provide affordable housing without government support. To overcome these constraints, Tata Housing selects developing townships that are well connected to the main city and where adequate infrastructure, and proximity to workplaces, shops, schools, and medical facilities make them attractive. Tata Housing aims to take advantage of the changing perception of such districts before land prices rise. The company does not own any land, rather it develops projects on a joint ownership basis with landlords, which helps the company maintain an asset-light model enabling higher rates of return and a shorter break-even period than is seen in more up-market developments. In order to reduce upfront acquisition costs, it also engages in public-private partnerships with government authorities for land where development approvals have already been secured.

To ensure houses remain affordable for low-income clients, operational costs have to be kept under control. This is achieved in part by developing a low-cost model that entails the building of smaller–sized buildings with standardised apartments and compact living spaces (32–46m²). Keeping construction costs low is an enormous challenge as for affordable housing they constitute up to 60% of the total sale price – in up-market projects they make up around 20% of the price (Figure 1). The rising price of materials such as steel, cement and sand, and rising labour costs, have led to a 100% increase in construction costs over the past decade, adversely affecting affordable housing more than up-market construction (Jones Lang Lasalle, 2012).
To protect themselves from this price volatility, Tata Housing seeks long-term contracts with vendors and suppliers. The use of low-cost technologies and raw materials such as reinforced concrete blocks, precast hollow blocks, precast lintels, floor tiles and polymer panels helps reduce construction costs by 20–30%. Technological innovation such as pre-fabricated buildings, made off-site and transported to the project, allow for multiple repetitions and quicker delivery while reducing dependence on labour and circumventing climate constraints. Achieving economies of scale is another vitally important element of the low-income housing model.

Adapting the offer

Low-income solutions require minimizing costs whilst balancing the quality, safety and serviceability of the product. Tata drew on in-depth consumer research to design housing suited to the needs of low-income families. One of the most important requirements is to deliver quickly as low-income clients cannot afford delays. This means that an affordable housing project cannot emulate standard residential development schemes in which developers release their stock in tranches, expecting to realize gains due to rising real estate prices. With innovative technologies, such as pre-fabricated buildings, projects can usually be completed within a relatively short period of time of around 18–24 months. This also ensures Tata Housing speedy sales and reduced cash-flow risks, which is of great importance for low-income developers. Another important aspect is to offer sustainable housing, which minimises maintenance costs and energy consumption for clients. Tata Housing has been the leading proponent of sustainable developments in India – its premium, luxury and affordable housing schemes are all certified by the Indian Green Building Council (IGBC). Tatas’ IGBC-certified homes achieve 20–30% energy savings, compared to classical homes, by using for example glazed windows, energy-saving compact fluorescent lights, solar public lighting and 30–50% water savings through rain-water harvesting.
The combination of low-cost and easy credit is also key to the success of affordable housing initiatives. Commercial banks and other traditional home loan providers typically do not serve low-income groups. Developers like Tata can, however, partner with microfinance institutions to make home finance options available to buyers from the informal sector. Tata Housing works with the Micro Housing Finance Corporation to provide access to finance to end-buyers of Shubh Griha projects that cater for households with an annual income of less than the equivalent of USD 160. The success of a Shubh Griha project of around 1,000 apartments in Ahmedabad reflects the relevance of Tata Housing’s offer. Around 10,000 people applied to buy a unit within a few days and lots had to be drawn to allocate the new homes.

Challenges of the affordable housing sector

The affordable housing sector may well be attracting a growing number of players, but the obstacles facing these developers are legion. Bureaucratic, regulatory and financial constraints prevent the market from achieving anywhere near its potential. Figures from the Town and Country Planning Organization show that 85,000–121,000 hectares of additional land are needed to cater for the demands of those earning less than USD 320 a year alone (KPMG, 2010). But finding land for development remains a major problem. It is a lengthy and costly process due to the difficulty of obtaining accurate transactional data – notably transaction prices – and the lack of comprehensive land mapping. Buyers thus lack access to reliable information on the options available to them and have to contend with an unregulated sector, with many uncertified intermediaries, for their land transactions. Policy measures, such as free-sale areas or extra Floor Space Index (FSI) ¹ to facilitate access to land and encourage developers to create affordable housing, exist but they should be expanded and combined with further policies and proper urban planning. Mass housing zones should be included in city plans, and land records need to be rationalised to improve planning and the utilisation of land (Jones Lang Lasalle, 2012).

The long approval process required by authorities is another major challenge facing developers in the affordable housing sector, as the business model relies on relatively fast completion (Figure 2). A typical development at present needs around 18 months to secure approval and takes a further 18 months for construction (Jones Lang Lasalle, 2012). Delay often leads to cost overrun, while if approvals were granted more quickly, the same developer could produce up to twice as many low-income housing units with the same capital (Monitor Deloitte, 2013). Reducing the number of approvals needed and providing time-bound approvals would be of great help.
Another issue is the lack of land with good infrastructure. Laying out infrastructure on the outskirts of cities would open up more areas for construction, would potentially dampen price escalation of serviced land and would also increase the supply of homes to the country’s poorer families. Increased efficiency of urban local bodies – which oversee city planning, provide urban services and provide development approvals – and of urban development departments are key factor to creating a conducive environment for developers.
Frequent changes in real-estate and infrastructure policies, drastic modification of regulations, and overlapping guidelines are other factors that make project planning precarious (Jones Lang Lasalle, 2012). Developers buy land for projects that can take years from inception to completion, and are naturally perturbed if regulations are modified along the way. Inadequate regulation, combined with the absence of codified definitions and the lack of an authority to enforce building laws, is a disincentive for developers considering venturing into affordable housing. It is hoped that the planned creation of a new regulatory body will change this scenario. If the government, which takes 25% of the sale price of a property in taxes, ensured a level playing field, this would encourage more private players to enter the market to cater for the rising demand seen in India’s rapidly-urbanising landscape.

Home financing, a major obstacle

The odds are also stacked against low-income developers when it comes to securing finance for their projects. Many are excluded from access to commercial banks because these lenders mostly do not provide loans against land; instead they have to turn to private borrowing at prohibitive interest rates. Some banks will lend to them, but at exorbitant rates of around 18–19%. High finance costs add 10–25% to the unit sale price (Jones Lang Lasalle, 2012).
In the case of Tata Housing, which is part of a multinational group, access to funding has been relatively easy. It used internal group funding to recapitalise the company with USD 16.5 million in 2008 and USD 82 million in 2012. Tata Housing will have to seek additional funding for new ventures and is evaluating several options, such as setting up a real-estate fund, as well as a mix of other options like equity, internal accruals, mezzanine and debt financing. The situation is, however, different for most other private real-estate developers that lack cash or other collateral to support a construction loan, and the capacity to produce satisfactory project feasibility studies.
For its part, the housing-finance industry is seeing strong opportunities in the growing housing sector. But the opportunity to provide lower-cost mortgages to the end customer could be missed if housing finance companies and microfinance institutions are unable to access long-term affordable debt for refinancing purposes. Housing finance companies acquire debt at 10–14% and lend at 11–17% but microfinance companies are unable to get funding at less than 15–17% for tenure less than 3–4 years, making it problematic for them to lend for mortgages (KPMG, 2010). Through the National Housing Bank,² the government could provide more low-cost credit to financial institutions serving low-income customers, while ensuring this benefit accrues to the customer. Finally, there is also a need to include the real-estate sector in priority-sector lending for Indian banks, which have traditionally considered it risky. This would ensure that housing loans are more easily secured than at present.
For India to achieve affordable housing for all, a key policy of the government, there is a need to realistically address the constraints faced by private developers and to formulate policies that encourage their participation in the affordable housing sector. Supply-side measures to encourage developers need to be expanded. These include reduced taxes, faster approvals, ear-marking land for housing for those at the bottom of the income pyramid, mortgage-guarantee schemes to minimise the credit risk for the banks that finance the developers, and interest-rate subsidies (Monitor Deloitte, 2013). Demand-side interventions also need to be increased, including interest-rate subsidies through lower-cost refinancing for housing-finance companies and reduced taxes such as stamp duty and registration costs. To strengthen the market, the central government should also continue to oversee the development of a set of standards – clear definition of beneficiary segments, minimum size of housing units, criteria for projects to qualify for subsidies, etc. – that can be used by state and local governments for policy guidelines (Monitor Deloitte, 2013).

Footnotes :

¹ The ratio of a building’s total floor area to the size of the piece of land upon which it is built. An increase in FSI means that more construction can be done on the same piece of land.
² National Housing Bank, a fully owned subsidiary of the Reserve Bank of India, was set up primarily to accelerate housing finance activity in India and promote the Housing Finance Companies by providing them with financial support. It acts as the regulator of the housing finance industry.

References / Agarwal, A., Jain, V., Karamchandani, A., 2013. State of the Low-Income Housing Market, Encouraging Progress and Opportunity to Realize Dreams of Millions. The Monitor Deloitte Report. www.deloitte.com/in. // Jones Lang LaSalle, 2012. On.point, Affordable Housing in India, An Inclusive Approach to Sheltering the Bottom of the Pyramid. http://www.joneslanglasalle.co.in/India/EN-GB/Pages/ResearchDetails.aspx?ItemID=8780. // KPMG, 2010. Affordable Housing – A key growth driver in the real estate sector? http://www.kpmg.com/in/en/issuesandinsights/articlespublications/pages/affordablehousing-akeygrowthdriverintherealestatesector.aspx.