Affordable Housing

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All of a sudden, the realty sector seems to be singing a totally new tune. Affordable housing or low-cost housing is gradually occupying the centre stage of this industry. Just about 2 years ago, it was as unreachable to the Indian middle class as mobile phones were in 1995. Now, things seem to be changing pretty fast.

Nearly all real estate developers, who got hit badly by the global real estate meltdown, are planning to get into this new segment – that offers affordable houses for the masses. It seems quite logical for an industry that promised huge returns to investors and state-of-the-art housing facilities for customers not so long ago. Currently, most of these companies are either under huge debts or are fast losing their clients, or both. Numerous projects of these developers are on a halt due to dearth of money and stagnant cash flow.

Builders depend heavily on booking amount for their projects to get off the ground – the initial payment of 20-30% – and they use the same amount to get their loans sanctioned from their bankers. With booking of these premium properties touching rock-bottom, the developers are finding it tough to continue with their projects.

The situation is so dire that those clients who have had the misfortune of having made full or partial payment of their flats will have to wait for a few more years for possession of their property and this is all thanks to real estate slowdown. According to various surveys, around 53% (of the 930 million sq. ft) of available realty stock is still lying idle and unsold in the Indian metros.

Most of the realtors have a high debt to equity ratio of 1:4, as a result of bad cash flow. Many of the realty players are in no position to pay back their bank loans. Real estate companies have been asked by banks to repay loans via Qualified Institutional Placement (QIP) of securities. Recently, Unitech raised around $325 million through the QIP route. HDIL, Parsvnath, Puravankara, Sobha Developers, HCC and GMR, are planning to follow the same path. DLF’s promoters recently sold 9.9% of their shareholding in the open market.

Undoubtedly, this is the best time for the concept of low cost housing to take birth. Developers, regardless of their size, previous reputation and aura, are now turning towards this new business model of affordable homes. With urban housing shortage being predicted to be around 24.71 million, this is unquestionably a huge untapped market. For instance, Puravankara Projects and DLF housing projects, whose forte has been high end apartments, have recently launched low-cost housing subsidiaries, promising homes in the Rs.20-40 lakh range.

But then, is it really the transformation we have been waiting for? Going by NSSO survey and various other studies, even these flats worth Rs.20-40 lakh do not fall into the budget bracket of middle class Indians. It is therefore no surprise that this segment has also seen sluggish demand. A study of the housing market conducted by the Monitor Group for the World Bank showed that despite the high demand, builders did not find it attractive to enter the home segment in the price range below Rs.10 lakh. Talking about affordability, a back of envelope calculation shows that even if a middle class customer earning Rs.11000-15000 per month takes a bank loan, which is three times his annual salary, he/she will not be able to afford that dream home. 

Moreover, in the garb of getting into the affordable segment, most of the developers are apparently  straightening their own numbers. They are taking booking amounts from the middle class and are using the same amount to fund their pending projects instead of using it to develop property for these mid-income group customers. The reason is quite simple: In a high range property, developers can churn out a margin of more than 30%, while in the case of low cost apartments, the margin is below 10%. Furthermore, they find it easy to get bank loans (even at cheaper interest rates) in the name of low cost housing. Thus, after getting funds from various sources (from consumers to banks) they are channelising these funds towards their pending projects. Even if the developers pay late delivery or cancellation penalty to mid segment consumers, it would be very less compared to the penalty they would have to pay to high segment consumers – simply because the penalties correspond with the cost of flats. One can draw a parallel with the Tatas funding their short term debt requirements that came up due to the JLR acquisition, with the booking amounts they received for the Nano.

Moreover, this strategy  is not reflected in their balance sheets, as the companies have to file only a single consolidated balance sheet. They find it easier to club all their investments under one head and thus leave the consumer as well as the authorities guessing. There is still no provision to give details of their development and file a separate balance sheet or even mention them separately in their accounts.  Except for a few developers, who are solely into low cost housing, like Tatas, most developers are using the low cost housing system to fund their own pending projects. Moreover, as seen in recent budget, there seems to be lack of political will towards affordable housing. Neither is the government initiating projects of their own in this league nor are they interested in providing easy loans to these real estate sharks.

So these homes are nowhere near the affordable definition; in fact, hapless consumers may later find to their horror that they were taken for a ride. It thus becomes necessary for the authorities to direct the developers to file a separate balance sheet for both the businesses. We should not let a scam of such magnitude continue for long.