Realtors now recognise the attractions of affordable housing

Low cost housing had almost become a bad word for real estate companies, is the latest buzzword in the business now hit by an economic slowdown. Companies, which prided in building luxury villas and houses for higher segments, have suddenly started chanting the mantra of `affordable housing.'

"Villas for Rs 55 lakh (US$110,000) are out, now-a-days apartments for Rs 20 lakh (US$44,000) are in. We are targeting young professionals who may not have been affected by the recession (read: non-IT professional) and want their own home," says an industry observer. Companies now rushing into the Rs 20-22 lakh range include Janapriya Engineers Syndicate, Puravankara Projects, Golden Gate and Modi Builders among others.

Analysts, of course, point out that there is no definition of affordable housing and aver: "It's just that builders think a home that's priced around Rs 20 lakh is within the reach of more buyers."

A developer reputed for low-cost housing here explains the rationale for many builders now rushing into this segment. "When considering an expensive home, a buyer will definitely wait a few months for the prices to drop, but this does not happen with affordable homes, because prices are quite low already," he says, adding, "the effective EMIs on home loans for this category come around Rs 15000-18000 (US$300) per month, which many can afford."

Real estate companies also think that cheaper affordable houses will draw not only more but also younger customers. Bhanumurthy PVS, deputy general manager of Golden Gate Properties, says, "by keeping the prices low, we are trying to bring down the average age of the home buyer from 25-35 years to 25-30 years." The company recently ventured to offer 960 sft 2BHK apartments at Rs 19.9 lakh.

Nitish Ranjan, a 26-year old says, "Together, my wife and I earn Rs 80,000 per month. It wasn't difficult to get a home loan since we could convince the banker that we could pay the EMI," adding that he is not sure if he would have got a loan for a higher amount that a luxury home requires. Apart from the young, retirees are also drawn to houses at this level. "Even pensioners can afford these homes, when they come with frills like `Book now, pay on possession', life-time guarantees on title deeds and other lucrative warranties," says V P Arvind, a retiree who recently booked an apartment at Miyapur.

Developers are also buoyed by volumes. "Thinner profitability spread over a larger volume will result in large profits," explains Chris Thomas (www.speedwall.com). India's housing shortage increased from 19.4 million units in 2004 to 22.4 million in 2005-06 and "there has been a steady 25% year on year growth for the past five years in this segment," says Ravinder Reddy, CMD of Janapriya Engineers Syndicate, adding, "we have already developed 21,000 such apartments, including 12,000 in the last five years."

This unwavering demand has led to a steady price rise in this segment that has never seen a `correction', not even during the current slowdown. "It's the Rs 50 lakh plus segment that has the jitters; the Rs 15-20 lakh range is still selling fine," say observers. In fact, Puravankara Projects recently announced an investment of Rs 80 billion for affordable housing. It plans to develop 64,500 homes and a built-up area over 59.80 million square feet in major cities, including Hyderabad, in the next five years.

City-based players are also increasing projects around Madinaguda, Miyapur, Patancheru, University of Hyderabad and Nagole which are either industry hubs or close to the MMTS and metro zones.

China's investment into low-cost housing

CHINA will spend 900 billion yuan (US$131 billion) on building low-cost homes and renovating shanties in the next three years to solve housing problems for low-income families.

More than 2 million low-rent homes will be built, plus 4 million budget homes, while 2.2 million shanties will be renovated from 2009 to 2011, said Qi Ji, vice director of the Ministry of Housing and Urban-Rural Development. 

The plan is expected to solve housing problems for 7.47 million low-income families and create 2 million jobs, Qi said. 

About 10 million low-income families have housing problems in China. Two million of them have already had their living conditions somewhat improved under the country's housing plan.

The country will spend 100 billion yuan on low-cost housing this year. Eighteen billion yuan was spent on 320,000 low-rent units in the first three quarters.

The central government has allocated 6.8 billion yuan to subsidize low-rent home construction in central and western provinces, while local governments have collected 40 billion yuan for the project.

By the end of the year, the construction of 1.2 million budget homes will have begun and the country will start the renovation of shanties.

The State Council announced last Sunday that the country will take 10 major steps to stimulate domestic consumption and growth. In response to the central government's plan, some banks, such as the Bank of China, said they would boost credit to property developers and to low-rent property and affordable housing projects.

David Wardlaw from Speedwall Building Technologies (www.speedwall.com) commented that despite the downturn in real estate prices, governments are taking a long term view on the provision of housing especially to the poorer paid members of society.  He said that "investment at the base of the pyramid are becoming more and more attractive especially as financial instruments are increasingly allowing the poor to access the housing market.  Lower margin but high volume investment plays now have added investment security and consequently better prospects."

Low-cost homes for growth

Policy makers all over the world are increasingly reaching for old Keynesian fiscal policy tools to salvage economies sliding into recession.

Chris Thomas of Speedwall Building Technologies (www.speedwall.com) commented that governments have to concentrate their spending on public projects with the biggest social and economic spin-offs. Of these low-cost housing would rank high when it comes to a positive multiplier effect.  He states that Indian demand for low-cost housing today is estimated at over 24 million dwelling units and building these houses engages a large number of trades and trademen and finance.  Ultimately an asset is created which allows the house-owner to have more options in financing the family's future growth.

A comprehensive programme to build low-cost housing, which is aimed at incentivising the buyers (and not just the builders) could not only revive the demand for iron, steel and cement, but also protect the livelihood of countless unskilled construction labourers. For lenders, low-cost homes are a safer mortgage because of low price volatility, as compared to premium mortgages which have contributed to the asset price bubbles.

A well thought out interest rate subsidy to banks would significantly lower the equated monthly instalments (EMI) burden on buyers and also give comfort to banks. The demand certainly exists. An affordable housing project by a private developer at the outskirts of Mumbai city received 66,000 applications for its first phase of 3,000 units, of which 40% are one-room-kitchen flats, measuring 300 sq ft and priced at Rs 3 lakh each.

This at a time when other developers in the heart of the city are fighting a slowdown in sales. The project aims to create affordable housing for low-income groups without government subsidies, while being commercially viable. In 2007, a strategy consulting firm that has been doing extensive work in the area of affordable housing in India, conducted research that highlighted enormous demand for housing among low-income groups.

Key Asian economies are already lining up various stimuli to support the property market. The package announced by China has a slice for low-rent housing, while Singapore is willing to offer certain rights to foreigners who invest in their properties (though in this case not low-cost ones).

India which has so far felt only the ripples of a global fiasco, is now beginning to see the country’s steel and car makers slashing production. Ambitious infrastructure projects may lack sponsors and not many lenders think these are bankable. But low-cost homes will always find takers.