Indian housing sector

A review

With a population of 1.2 billion, India as a market, provides the strongest demand for housing as compared to any other country in the world. Given such a high demand, one would generally expect the housing sector, and the associated real estate sector, to perform very well. However, we are seeing that the Indian housing and real estate companies are going through a rough patch! In spite of residential apartments in the range of Rs 60 lakh to Rs 1 crore, upwards, being abundantly available, the common man in the country is unable to have access to apartments in the range of Rs 2.5 lakh to Rs 15 lakh! Especially, with India having a majority of middle and lower income groups, more housing is required in the middle and lower segment rather than the premium segment; existence of such disparity has been a serious concern! Why are real estate companies unable to develop ‘lower end’ apartments? What are the challenges faced by the Indian housing and associated real estate sector? An insight…

Dr Suresh Srinivasan
The major demand drivers for the residential demand stems from the India’s increasing disposable income levels, increase in the number of nuclear families and households, tax savings on home loan products as well as from an Indian cultural perspective, real estate is considered a ‘necessary’ investment. Housing sector, in the Indian context, is classified into three distinct segments:

• Premium segment which ranges above Rs 3,500 per sq ft with apartment size in excess of 1,700 sq ft. This segment offers large unit sizes, high-end facilities, and premium specifications and amenities.
• Mid-market segment ranging around Rs 1,700 to Rs 3,500 per sq ft with apartment size of around 1,000 sq ft
• Low-cost housing segment which ranges around Rs 400 to Rs 600 per sq ft with apartment size of around 300 to 400 sq ft.

(All prices detailed above are with respect to Tier-II city, as prices in Tier-I cities like Mumbai and Delhi are very high due to lack of land availability).

There is a severe shortage of residential units in the country. Currently, it is estimated that the shortage is in the range of 3 to 3.5 crore houses. In the medium term future, this gap is expected to widen with around 50 to 60 lakh houses required on a year on year basis. Rising disposable incomes, financing terms and growing population will continue to be the driving force of housing demand in India. But the interesting fact is that, more than eighty percent of such shortage in house is in the ‘low cost’ housing segment. Majority of the Indian developers have continued to focus only on the premium segment, as it offers better returns, ignoring the .mid-market and low cost housing segments.
The inability of the housing companies to deliver appropriate housing and more specifically affordable housing to the country’s population arises out of the following fundamental issues:

• Challenges faced by the housing companies in India; this again could be short term challenges and longer term challenges.
• Longer term challenges include the issue of ‘affordability’ of home buyer and Lack of scale and technology in building low cost housing.
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Short term issues driven by economic and demand fluctuations
Global economic fluctuations and its impact on the Indian economy have had a strong bearing on the housing sector. Real estate witnessed its peak during the first three quarters of 2008, with residential prices reaching an all time high, largely led by investor driven market speculation, but saw a steep fall afterwards. During this period, the real estate companies in the business of developing houses borrowed significant amounts from the banks to increase their ‘land bank’, but were unable to monetize the same and convert such land bank back into cash due to the drop in demand for housing during the economic slowdown of 2008-09. Decreased sales momentum, high interest rates significantly increasing housing finance costs, job losses due to poor industry performance, salary and increment cuts; all of these made it difficult for the consumer to move towards obtaining a bank loan and owning a house. Further, banks started restricting finance flow to the housing companies as they were already struggling to pay back bank loans due to reduced demand. Hence the housing companies were hit from both sides; a combination of these two factors reduced the overall demand for houses, drastically.  Many housing developers were unable to tide through such difficult times. The government needs to address this issue by providing appropriate tax breaks and sops to housing companies, as such companies address a very vital component of the economy!

The issue of affordability
Although there is demand for ‘low cost’ housing, the population with low income has a serious ‘affordability’ issue even in owning such low cost houses. This basically arises due to the fact that such population does not satisfy the basic conditions stipulated by the banks for extending long term loans; i.e., a mismatch between bank requirements and what the home buyer can offer! Simply put, given the current regulations it is not viable for banks to finance these low income home buyers. Such mismatches range from being engaged in the unorganized sector, lack of formal employment, inconsistent income streams, inability to provide appropriate security, etc. So from a regulatory perspective, the government’s vision should ensure that every citizen of the country own a house, and provide an appropriate platform to finance such a section of the population. This could be done through preferential interest rates, relaxing security norms, subsidizing the cost of the house, etc.

Lack of scale and technology to build low cost housing
However, the bigger challenge arises from the fact that construction companies have been unable to develop technologies, which are internationally available, that will bring down the unit cost of constructing housing units. Today, the most popular method of constructing housing units is the traditional brick and concrete construction; ninety five percent of the Indian contractors still resort to this traditional method. However, standardized repetitive construction is possible through ‘factory’ type pre-fabricated concrete panels manufactured at factories that would just be assembled at the site resulting in significant savings in time and cost. Such technologies are prevalent in other developed economies, but are yet to be introduced into India, in a big way. A reason for this is that companies need to take the risk and invest large sums in order to adopt such technologies, which they are unable to do so today, due to lack of volumes and scale. But there is already a trend towards this as many companies have identified this as a niche area as the demand potential is enormous. Many real estate companies and developers have started focusing on affordable housing segment in order to cater to the needs of the lower and middle income home buyers. Also, moving away from metros and cities to suburban areas in creating large scale townships will also drastically reduce the cost of houses!
The government has to address the above issues in order to facilitate more companies to come forward into the business of affordable housing as well as increase the affordability of the lower end population. It is hence a question of time before we see affordable houses being offered to lower and middle income groups!