Outlook for Affordable Housing in India Promising, but Challenges Remain

The policy push for affordable housing sector, provided through several announcements in the Interim Budget for 2019-20, not only strengthened the government agenda of ensuring ‘Housing for All by 2022’ but also provided for a healthy growth trajectory for the real estate sector at large.

Some of the incentives which were announced in the budget include tax-related measures to stimulate demand for housing sector across the country. For example, rollover of capital gains under section 54 (Income Tax Act) was increased from investment in one residential house to two, for a tax payer having capital gains up to INR 2 crore. Similarly, steps were announced to bring back the focus on affordable housing sector. Interestingly, the affordable housing sector was as a key beneficiary of sops throughout 2018 and 2019.

For instance, the benefits under Section 80-IBA of the Income Tax Act is being extended for one more year, or to the housing projects approved till 31st March 2020. The GST on under-construction homes has also been slashed. Effective 1st April 2019, GST rate for under-construction affordable homes has been slashed to 1% per cent from 8%, while for all other under-construction houses, the GST rate has been reduced to at 5% (without ITC) against the present rate of 12%.             

Meanwhile the definition of the affordable housing too was changed for both metropolitan and non-metro cities. As per the new rules, a 60 sq. m. house in metropolitan cities (Delhi-NCR including Delhi, Noida, Greater Noida, Ghaziabad, Gurgaon and Faridabad), Bangalore, Mumbai – MMR region, Chennai, Hyderabad and Kolkata) having value up to INR 45 lakhs will now be considered under projects marked for affordable housing. The same limit has been revised to 90 sq. m. in non-metropolitan cities/ towns with value up to INR 45 lakhs. The previous limit for metro cities was 30 sq. m and 60 sq. m. for non-metro cities. This will further increase the demand in affordable housing segment and will help increase its consumer base both in metro and non-metro cities. Besides bringing in more projects under finance schemes, it will also help address the housing requirement of people according to their aspirations. 

Recently, the National Housing Bank proposed that the capital adequacy ratio norms of housing finance companies be increased. The bank has proposed to increase the capital adequacy ratio for housing finance companies to 15% in a phased manner by March 2022. The current ratio for these finance companies stands at 12 %, which will be increased by 1% over the next three years. While the move may somewhat impact liquidity in the short term, it is expected to help in long-term financial stability of housing finance companies, which are vital to the affordable housing ecosystem.

The supportive policy framework for affordable housing coupled with the government’s vision of ‘Housing for All’ by 2022 provides a positive outlook for the sector. The incentives announced in the budget coupled with policy iterations all along the year are expected to boost investor confidence, ease liquidity, and promote the housing sector in the country. 

Besides the above, infrastructure building and strengthening was an important message in the recently announced budget and steps have been taken in the right direction to make housing affordable to a larger section of the population. Following the policies, real estate developers will be inclined to explore opportunities in tier-II and non-metro cities. It will also provide them the flexibility to explore projects of various sizes and nature and developers can also come up with projects that are in complete alignment with the government policies, thus easing out the approval processes to avail the required benefits.

In order to bring the attention of buyers back in the sector, the government has also taken right steps to increase the limit of disposable income among the potential buyers and make investment in secondary house a good investment option.

The overall positivity in the economy will also play an important role in revival of the residential real estate market and people will like to invest in options which they think will provide them safe return. The important thing here to note is that the positivity in the residential market will become visible earlier than other areas and it will also be viewed as one of the biggest confidence building measure for the real estate industry. 

While all these announcements paint a positive outlook for the sector, few challenges too need to be overcome to ensure that the growth momentum continues. There is a need for a clear definition for “infrastructure status for affordable housing” to allow all stakeholders to get a clearer picture on their expectations, while investments need to be encouraged by increasing private participation in the segment. This can be addressed by providing land at subsidised rates for affordable housing. Relaxation in floor area ratio and density norms, along with rebate on construction material are also needed to provide an impetus to the segment.

A dedicated single-window for granting approvals for affordable housing projects could be of significant assistance as completion timelines are critical to ensure that affordable housing projects remain viable and profitable. The government also needs to ensure greater coordination between the centre and state governments when it comes to affordable housing policies.  

As affordable housing projects are aimed at middle and low-income families, it is vital to strengthen the micro-finance ecosystem. There is a need to work towards enhancing the middle and low-income household’s access to affordable finance.

To further strengthen the demand for affordable units, the government should look at rationalising or waiving off registration charges, as well as stamp duties for such units. There is a need for developers to invest in innovative construction technologies to promote mass housing developments at subsidised construction costs. Portable modular housing units and prefabricated construction technology are some techniques that could be looked at to address affordable housing needs. A holistic line-up of such demand and supply side interventions can ensure that the slew of budgetary incentives, government allocations, and the real estate sector’s involvement, achieve fruition.

By Anshuman Magazine, Head of India, South East Asia, Middle East and Africa, CBRE.