Affordable Housing Hype or Happening. Real(i)ty

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1 Affordable Housing Hype or Happening Real(i)ty October 2017

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3 From the Desk of CEO- Real Estate Advisory Practice India would require about 20 million housing units in the rural as well as urban areas by 2022 to achieve the vision the current government of providing a roof on every head by With the urban population growing at an average 2.1% every year since 2015, it is likely to reach 60 crore by But the growth in housing has been unable to keep pace with the growing demand. Affordable housing finance (largely for loan ticket size up to `1.5 million) will become a large segment for housing finance companies in the next five years, with the estimated share to increase to around 37% in FY22 (FY17: 26%) (source: Ind-Ra). A combination of factors such as government financial and policy thrust, regulatory support, rising urbanisation, and increasing affordability is converting latent demand into a commercially lucrative business opportunity. It is estimated that the affordable housing segment will grow at 25% given the subsidies under the Pradhan Mantri Awas yojana. There has been a shift by the builders towards modest apartments to suit the middle class pockets. A clear indicator of this is the sharp uptick in home loans driven by sales of houses costing below Rs 30 lakh. Some of the concrete steps taken by the Government to boost affordable housing like allocating to 4,000 crores for low-cost housing schemes, relaxation of FDI norms for the affordable housing sector, we can be hopeful of diminishing the gap between demand and supply for low-cost housing. Going ahead, Urbanisation should be guided towards inclusive and equitable growth of towns and cities with proper civic amenities. The key would be to focus efforts towards land and housing policy reforms, delegation of power to urban local bodies, fostering innovative housing finance and steps for reduction in project costs and schedule overruns. Planned urbanisation would ensure that towns and cities are free from slums and provide for adequate opportunities for productive employment and an optimum quality of life to all their inhabitants including the marginalised segments of the society. Yours sincerely Ram Yadav ii

4 Real Estate Advisory Practice From the Desk of Head- Real Estate, Centre of Excellence "It is time for planners to abandon abstract objectives and to focus their efforts on two measurable outcomes that have always mattered since the growth of large cities during the 19th century's industrial revolution: workers' spatial mobility and housing affordability."- Alain Bertaud- Former principal planner, World Bank The definition of affordability may have varied from city to city, but there is a consensus that urbanization of cities and growth in population, the demand for affordable housing is far greater than the supply available in the market. Several subsidy schemes have been introduced by the government to promote Affordable Housing like incentivizing real estate developers, buyers and lenders along-with varied tax incentives, some of which have been highlighted in this newsletter. The government policy has encouraged planning and completion of "Group Housing Projects" wherein apartments of "pre-defined size" are made available at "pre-defined rates" within a "Targeted time-frame" as prescribed under the present policy to ensure increased supply of Affordable Housing. A developed country is not a place where the poor have cars. It's where the rich use public transportation. Gustavo Petro, Colombian Economist Housing of All can be achieved when there is improved infrastructure, right priced land, faster approval processes and innovations in modern construction technology to built mass housing in short time span. We have tried to represent various stake holders in this newsletter. Happy Reading! Warm regards Puneet Bhatia iii

5 Table of Contents From the Desk of CEO- Real Estate Advisory Practice ii From the desk of Head- Real Estate, Centre of Excellence iii Table of Contents iv Introduction 1 Affordable Housing- Definition 2 Global Scenario 8 Approaches of cities across globe towards Affordable Housing 9 Critical Issues & their significance 17 Conclusion 19 Team CoE 21 Disclaimer 21

6 Real Estate Advisory Practice Introduction India is a rapidly urbanizing country facing development challenges associated with growth. One of the key challenges for a developing country like India is urban migration, which is further exacerbated by limited resources to meet increasing housing demands. The high percentage of labour migration from rural areas to cities has contributed to urban congestion, pressure on infrastructure and most of all, housing shortages in cities across the country. In the recent past, policies and programmatic interventions of the Ministry of Housing and Urban Poverty Alleviation (MHUPA), supported by budgetary interventions, have ushered a new era of reforms in the states and the private sector alike. Disposable income of the people remains the primary factor in determining the affordability. As a result, it becomes the increased responsibility of the government to cater to the rising demand for affordable housing. Affordable housing has been the sector, riddled with several challenges such as lack of land, high construction costs, unfavourable tax environment and lack of incentives. A major catalyst instrumental in this segment's growth was the Indian government's ambitious housing program. In 2015, the current government announced the 'Housing for All by 2022' scheme targeting two crore homes to be built across all urban locations over the next five years. This report attempts to analyze the Indian affordable market and identify and underscore opportunities in this segment Central level housing policies and scheme

7 Affordable Housing- Definition The meaning of Affordability per se changes with the context being considered. As a result, there is no fixed definition of affordable housing that can be applied uniformly Different countries have different definitions for affordable housing, but it is largely the same, i.e. affordable housing should address the housing needs of the lower or middle income households. Affordable housing refers to housing units that are affordable by that section of society whose income is below the median household income. Affordable housing is defined for houses of values upto ` 65 lakhs located in the six metropolitan centres viz. Mumbai, New Delhi, Chennai, Kolkata, Bengaluru & Hyderabad & houses of valus upto ` 50 Lakhs in other centres for purchase/construction of dwelling unit per family Reserve Bank of India, 2014 An Affordable housing Project can be a mix of houses for different categories but it will be eligible for central assistance if at least 35% of the houses in the project are for EWS category & a single project has at least 250 houses Pradhan Mantri Awas Yojana, 2015 Affordable Housing VS Low cost Housing Affordable Housing Low Cost Housing Affordability as a measure of expenditure on housing to income of the household Less expensive than average or than what one can afford. Offers all basic amenities & facilities with quality, lasting construction Basic apartments with bare minimum facilities, located on fringe areas of the city Makes good economic sense for LIG & MIG segment ` Housing meant for EWS category Typical size from 300 sf sf Typical area is <300 sf per unit 2

8 Real Estate Advisory Practice Market Dynamics in India India would require about 20 million urban homes and 30 million rural houses by 2022 to achieve the vision of 'Housing for All by 2022'. Of the 20 million home requirement in the urban areas, 95% is in the EWS (Economically Weaker Sections) and LIG (Low Income Group) segments. This development is estimated to need investment of more than USD 2 trillion, which translates to about USD 250 to 260 billion annually(source:kpmg), more than double the annual investments witnessed in FY14. Within urban housing, it is the affordable housing (houses for EWS/LIG households) which require attention on priority basis, as it alone would require about half of the total investments and 70 per cent of urban housing needs envisaged. India s Population 120 Cr Urban 30% 36 Cr Rural 70% 84 Cr 36 Cr Urban Population = 8 Cr Households* URBAN POPULATION 5.8 Cr 2.2 Cr Potential Demand 2.2 Cr HH Forecasted Urban Demand 2.6 Cr HH # Total Demand 4.8 Cr HH # *Avg. Family size = 4.5 Calculations are done keeping Population & Avg. Family Size as constant India is on the verge of large scale urbanisation over the next few decades with more than 10mn population getting added to urban areas. It is estimated that India's urban population is expected to reach about 810 mn by Several structural issues such as high gestation period of housing projects, limited and expensive capital, spiralling land and construction cost, high fees and taxes, unfavorable development norms and low affordability by Economically Weaker Section (EWS) and Lower Income Group (LIG) households are bottlenecks restricting desired growth in housing stock in India with respect to housing demand. 3

9 Major concern is widening gap between demand & supply of affordable housing and inadequate financing solutions Demand Supply Rapid Urbanization Growing Economy Culture of Home Ownership Rising Income Nuclear Families (Avg. Family Size decreased from 5 to 4.4) Rising Construction Costs Large supply concentrated in luxury & upper mid-income segment Lengthy Legal & Regulatory Processes Lack of availability of cheaper urban land Lower Profit Margins & high senditivities to changes in input costs, project delays etc. Urban Housing Shortage 16% 24% 10% 5% 7% 5% 6% 7% 6% 6% 7% UP AP RAJASTHAN GUJARAT Maharashtra TAMILNADU MP OTHERS WEST BENGAL BIHAR KARNATAKA STATE SHORTAGE in mn (2012) UP 3.1 MAHARASHTRA 1.9 WEST BENGAL 1.3 AP 1.3 TAMILNADU 1.3 BIHAR 1.2 RAJASTHAN 1.2 MP 1.1 KARNATAKA 1 GUJARAT 1 OTHERS 4.52 TOTAL Almost 50% of shortage is in 5 states of UP, Maharashtra, WB, AP, Tamilnadu 95% shortage in EWS & LIG Segment Nearly 30% of India's Population lives in cities & Urban areas & increasing urbanisation has led to tremendous pressure on land, civic infra, transport, open space etc especially on Housing for Poor/ EWS/ LIG Segments Until 2022,70 % of the housing needs would be concentrated in just nine states. These states are Uttar Pradesh, Bihar, Maharashtra, West Bengal, Madhya Pradesh, Andhra Pradesh (including Telangana), Rajasthan, Tamil Nadu, and Karnataka. Potential Urban Housing Demand of 29 Mn HH currently, to increase to 45 Mn by 2022 (KPMG Report) 4

10 Real Estate Advisory Practice Opportunities for Stakeholders Government's planned several initiatives such as National Housing Policy (NHP), 1988, National Housing and Habitat Policy (NHHP), 1998 focused on transition of public sector as a facilitator to increase role of private sector, Jawaharlal Nehru National Urban Renewal Mission (JNNURM) which was aimed to implement reformdriven, planned development of cities with focus on up-gradation of urban infrastructure to fulfil its goal of Housing for all. In 2007, under National Urban Housing & Habitat Policy (NUHHP) Government identified 'Affordable Housing for All' as a key focus. Further, in 2007, under Rajiv Awas Yojna (RAY), envisaged 'Slum-free India' for by encouraging states to tackle the problem in a definitive manner. Combined impact of Government's earlier initiatives and 2017 budget reliefs has provided much awaited boost to the real estate sector creating win-win situation for both the developers & the buyers Union Budget 2017 Updates INFRA STATUS SIZE FIPB ABOLISHMENT INTEREST SUBVENTION Easier access to capital for developers at a much lower rate with a longer pay back period Simplification in process of approvals - & likely increased participation from Private Players 30 Sq Mt (Carpet Area) within Municipal City Limits in 4 Metros; 60 Sq Mt (CA) within 25 Km of Municipal Limits in 4 Metros & Non-Metros 100% tax deduction on profits are allowed Buyers get more spacious homes than before & developer is able to market the product to a larger segment of clients Easier access to Interest subventions foreign funding schemes are given as no approval to EWS, LIG, MIGrequired from FIPB I & MIG II from 3% - 6.5% varying on income levels & max tenure is kept at 20 Years 5

11 I. Developers % deduction of profit from business of developing affordable housing projects satisfying certain conditions such as a. Carpet area of residential unit is less than 30 sq mt in metro cities and 60 sq mt in non metro cities, b. Project is completed within 5 years from the receipt of approval, c. The project land is not less than 1000 sq mt, if situated within 25 km radius of the metro cities & 2000 sq mt, if situated in non metro cities d. Not more than 1 unit is allotted to an individual or any family members 2. Affordable housing segment accorded infrastructure status indirectly granting all the benefits such as loan at lower interest rates, longer payback period, simplified approval process for affordable projects, clear guidelines and increase transparency in the segment 3. Easier access to foreign funding as no approval required from FIPB 4. Relief from payment of income tax on notional rent income on unsold inventory of the developer for a period of 1 years from the date of possession 5. Developers constructing EWS houses would be eligible for `1.5 lacs of Government assistance per EWS house constructed II. Buyers In order to expand institutional credit flow to the housing needs of urban poor has implemented Credit Linked Subsidy Scheme ( CLSS ) component 1. Interest subsidy will be credited upfront to the loan account of beneficiaries through Primary Lending Institutions resulting in reduced effective housing loan and Equated Monthly Instalment (EMI). The Net Present Value (NPV) of the interest subsidy will be calculated at a discount rate of 9% 2. EWS/LIG a. In order to expand institutional credit flow to the housing needs of urban poor Credit Linked Subsidy Scheme ( CLSS ) has been proposed & implemented Beneficiaries Annual Interest Loan Carpet Income Subsidy* Amount Area Economically Weaker section ( EWS ) < Rs.3,00, % Rs. 6,00, sq mt Low Income Group ( LIG ) Rs.3,00,001-Rs.6,00, % Rs. 6,00, sq mt Middle Income Group - I ( MIG-I ) Rs.6,00,001-Rs.12,00, % Rs. 9,00, sq mt Middle Income Group - II ( MIG-II ) Rs.12,00,001-Rs.18,00, % Rs. 12,00, sq mt *for a loan tenure of 20 years or less b. CLSS would be available for housing loans availed for new construction and addition of rooms, kitchen, toilet etc. to existing dwellings as incremental housing c. CLSS for MIG will support acquisition/ construction of house (including re-purchase) d. EWS constructing new house on their own may avail 1.5 lakhs under Pradhan Mantri Awas Yojna 6

12 Real Estate Advisory Practice III. Financial Institution In an ideal PPP scenario, 1. Public sector could look into a. Aggregating land for projects, b. Providing single-window and time bound clearances, c. Redrafting the local development byelaws to suit the requirements of Affordable Housing projects: Review local byelaws like setbacks, parking norms, etc. and fine-tune the same to meet the requirements of Affordable Housing projects d. Re-evaluating the taxes and levies from the perspective of reducing cost of home ownership for the target segment: Reduction/exemption of taxes and duties on construction materials can significantly reduce construction-related costs 2. Private sector entities can a. Leverage core competencies such as Planning & Design, Project Development, Technology best practices, Project Financing, Human Resources, Sales and Marketing. 7

13 Global Scenario The United Nation recognized the importance of access to decent affordable housing as a fundamental human right for the health and well-being of people and the smooth functioning of economies and has imbibed it in the United Nations Universal Declaration of Human Rights. But all across the globe, high housing costs is a common feature, creating challenges for individuals, families, governments and businesses. The resulting negative impact is Stakeholder Society City Administration/ Negative Impact of High Housing Cost The trend of rising rent and house prices is leading to social change as lower earners are pushed out of cities creating another class of social-divide These are struggling with the dual challenges of- Government o Housing their poorest citizens Individuals/ Families Businesses o Providing housing at a reasonable cost for low- and middle-income populations Junior and mid-tier employees are facing long commutes and spending increasing proportions of their salaries on accommodation High housing cost in turn drives up the wages employers need to offer to retain and attract the best staff, making difficult for smaller businesses and start-ups to survive The current situation of housing across globe as per an estimate of Mckinsey Global Institute is- 330 million urban households around the world live in substandard housing or are financially stretched by housing costs. 200 million households in the developing world live in slums; In developed economies like United States, Europe, Japan, and Australia, more than 60 million households are financially stretched by housing costs Resolving this socio-economic issue of providing access to affordable housing have been and would be detrimental for developed/ developing economies to sustain and grow. Let s look at some of the approaches adopted globally by cities to address their housing challenges in the next page. 1 Mckinsey Global Institute (Oct 2014). A blueprint for addressing the global affordable housing challenge 8

14 Real Estate Advisory Practice Approaches of cities across globe towards Affordable Housing 1. COORDINATING LAND USE AND TRANSPORT PLANNING Land use and transport planning policies (apart from direct public involvement in housing development) are some of the key tools local authorities have used to address housing challenges. i. Hong Kong Linked Housing & transport at both Policy & Practice levels In 2014, Housing and Transport Bureau launched its Long Term Housing Strategy linking housing & transport at policy level and awarding property division tenders for residential developments close to railway stations. The aim is to supply around 4,60,000 units, with a public-private split of 60:40 between 2016 and 2026 ii. Singapore Investment in public housing and effective land use The city launched a public house-building drive by forming the Housing and Development Board (HDB) in 1960, followed up by various policies enabling middleincome and lower earners to buy property or rent HDB homes. The ongoing programme involves working with urban development authorities on land use, and includes releasing land for new towns and devising optimal land use strategies. Around 80% of Singapore's citizens now live in public housing, with 80% of these owning their own home iii. San Francisco Public Land for Housing Program 2. INFLUENCING HOUSING FINANCE In 2014, the city set up Public Land for Housing Program to collectively address housing, transportation and neighbourhood sustainability by re-purposing of city-owned properties. The programme prioritises portfolio opportunities to address housing needs and will accordingly selecting development partners. As of today, five pilot sites have been identified and the first to be explored in detail is Balboa Reservoir, with development approvals scheduled for Along with planning, cities have pursued of financial approaches such as tapping debt and equity markets to fund affordable housing development. i. Brazil Provided access to credit for low-income families In 2009 CAIXA, the country s third largest bank developed Minha Casa, Minha Vida (My Home, My Life), country s ambitious scheme providing access to credit and support for lower income families. The scheme is focussed at upgrading slums and granting land tenure to residents, conversion of abandoned buildings, new construction and critically, rent subsidies. It has delivered over 2 million housing units and enabled 8.3 million people to own their own home. ii. Mexico Subsidising mortgages for centrally-located housing In 2012, the Mexican Government launched Infonavit (Institute of the National Housing Fund for Workers) introducing subsidised mortgage loans that focused on ensuring access to good quality housing for Mexican workers. In 2014, this programme provided over 75% of all mortgage loans to house buyers 9

15 iii. Singapore Allowed individual social security funds for home purchases Signapore allowed citizens to withdraw savings from mandatory CPF (Central Provident Fund) before the age of 55 to invest in either public housing or private property up to certain withdrawal limits. In case the property is sold, members have to refund to the CPF the amount withdrawn along with estimated lost interest. 3. INFLUENCING HOUSING DEMAND Cities around the world from Paris to Dubai have experimented with measures to make property less desirable to speculators, limit investment from overseas, and support access to housing stocks for urban citizens. i. Beijing and Imposed Purchase limits for non-residents Shanghai In early 2000 s, the prices of real estate markets of Beijing and Shanghai rose to significantly higher level due increased flow of foreign capital in these markets. The Chinese Government, then intervened in 2006, & banned foreigners from buying property if they had been living or working in the country for less than a year. Foreigners were also not allowed to buy more than one property. This resulted into control of prices and the markets had cooled down significantly by ii. Dubai and Abu Dhabi iii. Hong Kong Concentrated foreign investment geographically Dubai and Abu Dhabi have sought to curb foreign property investment by limiting the areas in which those from overseas can buy. Similar restrictions on foreign purchase are in place in other cities of the United Arab Emirates (UAE). Although each emirate has its own legal framework for foreign investment, Abu Dhabi and Dubai follow very similar strategies. In these two emirates of UAE, foreign freehold ownership of property was severely restricted until Until today, only UAE citizens and other nationals of the Gulf Cooperation Council enjoy unlimited rights to buy property. At the same time to provide boost to certain geographies, foreign individuals and companies are allowed to purchase property in designated areas, called investment zones. Imposed taxes on foreign buyers and property investors It is one of the most densely populated metropolis and thus subject to higher demand leading to higher speculation by investors. As a result, between 2004 & 2015, the house prices rose by more than 250%. To regulate surge in house price, the Government introduced a series of measures aimed at making property speculation less attractive and stemming the flow of foreign capital into the real estate market. Some of the key measures implemented were- a 15% stamp duty tax for foreign buyers a special stamp duty of up to 20% if a residential property is re-sold within three years of purchase. 10

16 Real Estate Advisory Practice Stakeholder Assessment This chapter addresses the concerns dealt by different stakeholders associated with affordable housing. Following are the frequently asked queries in each segment. DEVELOPER Q. Which are the attractive locations for Affordable Housing Project and their distances from the city centre? A. With high prices of land within the city limits, the low cost projects can be developed in peripheral locations with good connectivity. The areas suitable for affordable housing in the metropolitan city of Mumbai are Ambivali, Karjat, Kasara, Palghar, Boisar which are at the distance of km from Nariman Point (City Centre). The web chart indicating the suitable locations from all the major cities of India is given below Distance in kms from city centre 11

17 Q. What are the characteristics of a typical affordable housing project? A. A typical affordable housing project has low project cost, limited option in terms of product configuration, reduced areas, shorter period of constructions and basic amenities. A typical affordable housing project in Indian Metropolitan Cities would have below mentioned characteristics SQ MT TARGET/ LOCATION 1,500 3,000 UNITS Efficiently utilizing the space Industrial zones in vicinity & suburban No. of Units; reduced margins which is within the norms & commercial nodes with of the city; however higher income volumes Incentives can be taken within 20kms of major workplace UNITS PER ACRE INR 8 12 LAKHS INR 2,500 3,000 PSF Units per acre dwelling density Price Range for 1 RK in sf & Launch rate in psf; EMI to be 1 BHK in sf around 30-40% of net monthly income of buyer G + 3/4 FLOORS MONTHS AMENITIES Building structure low rise Per phase construction period Basics viz. green area & some without lift to curtail social infra such as primary school & healthcare facility const costs Q. What would be the cost per sq ft if I construct an affordable housing project in Boisar, Maharashtra and what should be my margin expectations from the project? A. Affordable housing projects get more affected by rising cost of construction as compared to premium projects. Hence, it becomes important that costs are minimized for construction of low income housing whilst balancing the amenities provided as well as ensuring safety and serviceability of the built structure during its lifecycle. The pre-tax IRRs achievable in affordable housing project can range from 30%-35% (low values are the key) with gross profit margins of 15-20%. The indicative cost suitable for affordable housing project is being given in the figure below. The developers margins may come down over a period of time. The economics of time & timely project level completion are the key Cost INR per sq ft Project Cost Margin Land Cost Construction Cost Marketing Expense Admin Expense Approval Cost Misc Expense Gross Developer Markup Expense Head Selling Price Source: Through Market Research 12

18 Real Estate Advisory Practice Q. What benefits will I get from the Government if I construct an affordable housing project? A. There are various incentives made available by the Government to make it attractive for the developers. The benefits which can be enjoyed by you are listed below 100% deduction of profit from business of developing affordable housing projects satisfying certain conditions like carpet area should not be more than 30 sq mt and the land area should be more than 2000 sq mt. Further, not more than 1 unit is allotted to an individual or any family members. Construction of EWS houses would make your project eligible for Rs.1.5 lacs of Government assistance per EWS house constructed Also, to provide further impetus, the Ministry of Housing and Urban Poverty Alleviation (MHUPA), on September 21, 2017, announced a public-private partnership (PPP) policy, segregated into eight models, to promote private investment in affordable housing. Land Type of PPP Type of funding Land allotment Government s constructed model By government based on involvement by: in unit distribution Private Extension of CLSS CLSS Not applicable Yes Extension of Central assistance Not applicable Yes central assistance Design, build Based on progress of Bidding: Least cost Yes and transfer project as per agreed of construction model upon milestones per unit Cross-subsidised Cross subsidy from Bidding: Maximum Yes model revenue of high-end no. of affordable housing or commercial houses to be built development Government Annuity-based Deferred annuity Bidding: Low Yes subsidised housing payments annuity payment Annuity-cum-capital Upfront payment + Bidding: Low Yes grant-based housing deferred annuity annuity payment payments Direct relationship Cost recovery directly Bidding: Least cost No ownership housing from buyers of construction per unit Direct relationship Cost recovery directly Bidding: Least cost No rental housing from buyers (rentals) of construction per unit Source : Ministry of Housing and Urban Poverty Alleviation (MHUPA) 13

19 Financial Institutions Q. What is the size of opportunity for Financial Institutions in the Affordable Housing Finance space? A. There is expected to be a demand for 25 million homes over the next 4 years in the MIG and LIG categories. Within the Housing Finance Sector, the Affordable Housing Finance will increase in market share from 26% in FY 17 to 37% in FY 22. The sector is also expected to attract over INR 200 billion of equity inflows over FY17-FY22 to spur growth. Q. What will be the major obstacles likely to be faced if I decide to enter this segment? A. High operating cost structure, low profit margins, access to low cost funds, timely completion of projects, the lack of advanced approaches to credit assessment and absence of a full-fledged support infrastructure are some of the hurdles which can be faced in this segment. Q. Are there any incentives provided by the government available to me? A. Yes. A few steps have been taken by the government to attract Financial Institutions in this segment. Urban Housing Fund Refinancing Scheme was designed to provide refinance assistance to eligible primary lending institutions in respect of their loans extended for the purpose of purchase/ construction of dwelling units, repairs/ renovation/ upgradation of dwelling units and incremental housing. The individual loan size in this case cannot exceed INR 10 lakh The Micro Housing Finance Corporation was set up in 2008 to address the lack of finance available to lower income households in Urban India. Tax free bonds are issued by NHB and HUDCO to facilitate low cost funding to HFCs. NHB is encouraging setting up of housing finance companies (HFCs) dedicated to the low-income housing market. Q. When will I receive the benefit of Interest Subsidy from the government as per CLSS? A. An advance subsidy will be released to each Central Nodal Agency (CNA) at the start of the scheme. Subsequent amount of credit linked subsidy will be released to the CNAs after 70% utilization of earlier amounts, on quarterly basis, and based on claims raised by CNAs. Based on the loan disbursed by a Primary Lending Institute (PLI) to EWS and LIG beneficiaries, the CNA will release the subsidy amount to PLIs directly based on the claims submitted on the total loans disbursed in a maximum of four installments. Also, 0.1% of total fund disbursement by the CNAs to the PLIs will be paid to the CNAs for their administrative expenses. Q. What are the Financial Institutes/Primary Lending Institutes (PLI) through which CLSS will be implemented? A. Lending Institutions, Scheduled Commercial Banks, Housing Finance Companies, Regional Rural Banks (RRBs), State Cooperative Banks, Urban Cooperative Banks, Small Finance Banks (as approved by Reserve Bank of India), Non Banking Financial Company-Micro Finance Institutions' (NBFC-MFIs) (as registered with Reserve Bank of India) who have signed MoUs with any one of the Central Nodal Agencies (CNAs) will be the PLIs who will operate the Scheme. These PLIs need to enter into MoUs with one of the CNAs so as to claim benefit under CLSS. Q. Will MHUPA share the burden, where a loan becomes NPA and the PLI concerned is unable to recover the entire outstanding amount from the beneficiaries? A. It is the responsibility of the PLIs to carry out due diligence of the borrower as per their due diligence norms and the recovery of NPAs, if any, is their responsibility. However, if the construction of the unit is stalled due to any reason, the subsidy released by MHUPA is to be recovered along with loan recovery by the bank. 14

20 Real Estate Advisory Practice Customer Q1. What is Pradhan Mantri Awas Yojana and what benefits are available to me as a buyer of a house? A Housing for All Mission for Urban area will be implemented during The mission will be implemented through four verticals giving option to beneficiaries, Urban Local Bodies (ULB) and State Governments, as under:- i) In Situ slum Redevelopment ii) Affordable housing through Credit Linked Subsidy iii) Affordable Housing in Partnership iv) Subsidy for beneficiary-led individual house construction. Out of the above, Affordable Housing through Credit Linked Subsidy will be implemented through Financial Institutions. The beneficiary can take advantage under only one component from above. Q2. Is there a preference or priority order for the beneficiaries under this scheme? A Preference under the Scheme, subject to beneficiaries being from EWS/LIG segments, should be given to Manual Scavengers, Women (with overriding preference to widows), persons belonging to Scheduled Castes/Scheduled Tribes/Other Backward Classes, Minorities, Persons with disabilities and Transgender. Q3. In which cities/towns can I avail CLSS? A The Scheme will cover 4041 statutory towns as per Census List of 4041 statutory towns as per Census 2011 is available in Q4. Is there a minimum/maximum area specified in the regulations? A Yes. The carpet area of house being constructed or enhanced should be upto 30 sq.meters for EWS Category and upto 60 square meters for LIG category in order to be able to avail the Credit Linked Subsidy Q5. Is there any limit on the loan amount to be disbursed or on the value (Cost) of property for which home loan can be availed? A There is no cap on the value of property for which the home loan can be availed. However, the Credit Linked Subsidy will be available only for loan amounts upto Rs. 6 lakhs and additional loans beyond Rs. 6 lakhs, if any, will be at nonsubsidized rates. Q6. Can I also avail this subsidy if I build my own house? A The construction of a new house can be undertaken as per the scheme guidelines. For extension/repair, the area limit will be 30 sq.m. and 60 sq.m. of carpet area for EWS and LIG category respectively. 15

21 Q7. What is the maximum repayment period? Will I be charged a processing fee on the loan amount? A Maximum Repayment Period is 20 Years including Moratorium period upto maximum 36 months. No Processing Charge to be collected from applicant. In lieu of the processing fee for housing loan for the borrower under the scheme, PLIs will be given a lump sum amount of Rs.1000 per sanctioned application. Q8. How would I identify myself as belonging to EWS/LIG category? A For identification as an EWS or LIG beneficiary under the scheme, an individual loan applicant will submit self-certificate/affidavit as proof of income. Where the borrower is required to file Income Tax Returns as per existing Income Tax Rules the borrower has to submit proof of IT Returns as per extant norms of housing loan scheme. Q9. Currently which are the cities and projects where affordable housing is being developed? A Amongst the developers, Xrbia Developers, Tata Housing (Shubh Griha), Provident and VBHC are entirely focused on innovative affordable homes and have already launched multiple projects across cities, with announcements for large expansion into new cities and locations. Housing Development and Infrastructure Limited (HDIL) and Usha Breco Realty, both experimented the format with their projects successfully in Palghar and Boisar 16

22 Real Estate Advisory Practice Critical Issues & their significance There are various factors affecting the pace of affordable housing development in the country and restricting private sector participation in the sector. Examining the value chain of an Affordable Housing Project helps identify these critical issues and the corresponding bottlenecks. While doing so, it is important to critically examine the stakeholders involved in various activities and get a holistic understanding of the issues from stakeholders perspective. The key factors emerging from a close examination include the following: 1. Improper selection of land parcels for affordable housing projects Lack of availability of suitable land parcel within city limits High prices of land discouraging developer driven projects Lack of employment opportunities in the vicinity discouraging people from staying in these units Lack of External trunk infrastructure, Social infrastructure and Connectivity through public transport options, increasing the cost of living thereby resulting in lower occupation 2. Lengthy statutory clearance & approval processes Over clearances needed for each housing project, that too from multiple authorities Takes over 2 years for obtaining all the approvals, increasing the gestation period and project cost 3. Shortcomings in development norms, planning & project design Incongruence between the affordable housing policies of Central and State governments creating hurdles in availing the benefits of GoI schemes Restrictive FAR norms, density norms which make the affordable housing segment unattractive Insufficient action in providing social and external connectivity infrastructure by the concerned authority 4. Lack of participation of large organised real estate players Low profit margins High sensitivities to changes in input costs, project delays, etc. Lack of availability of skilled manpower 5. High cost of construction finance High cost of funds for construction finance (Developers in this segment are typically city/region specific having limited bandwidth) making these projects unviable Lack of suitable credit enhancing financial products for developers 6. Lack of a suitable mechanism for maintenance Negligence in maintenance of Affordable Housing units creating New Urban Slums Lack of sufficient funds/institutional mechanism to facilitate the required maintenance 17

23 7. Lack of access to credit (beneficiaries) Irregular, informal income sources with variations due to seasonality Risk management practices, cost structures of Banks, HFCs not aligned to these kind of customers Higher lending rates (small loan size, higher perceived risk) Lack of awareness among customers about financing options and GoI schemes such as Credit Linked Subsidy Scheme (CLSS) 8. Challenges in Beneficiary selection Beneficiaries do not relocate to the units allotted to them (location not suited to their occupation) Challenges in beneficiary selection process Lack of a beneficiary database to facilitate AH developers/ FIs to identify their target customers 9. Capacity constraints Inadequate capacity of implementing agencies lack of private participation, beyond land arbitrate models and guidance documents for PPP in the sector such as Model Concession Agreements/ guidelines Lack of mainstreaming of low cost technologies to achieve economies of scale 18

24 Real Estate Advisory Practice ConclusionGrowth & Way Forward Even though the urban housing shortage is primarily driven by EWS and LIG segments in India, the majority of the capacity addition has been going on in the segments beyond the reach of EWS and LIG customers. Real Estate developers and private players are focusing primarily on MIG and HIG segments owing to the higher returns from these projects. On the other hand high land costs, delay in project approvals, increasing raw material costs and low profit margins have made low-cost housing projects less attractive to the private developers. Also, housing (including Affordable Housing) being a state subject creates complexities in implementation because of precarious financial condition of development authorities, state/ city-level agencies and their limited capacities in handling in these projects. To successfully build India's Affordable Housing, collaboration between the central government ministries, state governments, urban local bodies, civil society, private sector, and financial institutions is essential. The collective agenda must advance the efficiency of affordable housing sector at an optimally low cost, while maintaining safety standards and basic amenities. To mainstream affordable housing, the government needs to predominantly act as an enabler for development and be involved in facilitating investments, both public and private, and streamlining processes across the value chain. Stakeholders will benefit from the availability of suitable land parcels with the requisite trunk infrastructure, expedited clearances, and an adequate organisation of financing. Moreover, for the planning and design process to transition smoothly into project execution, it is important that the development authorities have requisite capacity to handle projects of this type and scale which seems to be lacking. Lack of availability of suitable financing options for beneficiaries who predominantly work in informal segments is another bottleneck for mainstreaming of affordable housing in India. Furthermore, it is equally important that awareness amongst the intended beneficiaries increases to bring them into the fold of formal banking sector. Another key aspect that is widely neglected while planning an Affordable Housing Project is the maintenance post hand over of units to the customers/ beneficiaries. This eventually creates 'New Urban Slums' and defeats the purpose of creating these assets in the first place. It is of utmost importance to address this aspect to create sustainable benefits of creation of these assets. The Government of India in its schemes has taken many steps to boost the sector, but challenges still remain. For instance, while Rajiv Awas Yojana (RAY) envisaged an O&M fund for maintenance of assets created under the scheme with a onetime contribution from the central government, it could not be implemented at a wider level. Further, this feature is absent in the PMAY (Pradhan Mantri Awas Yojana) We need to keep in perspective that Affordable Housing Projects will cater to a much needed highly productive economic workforce in the country. It is imperative that both public and private sector join forces and drive innovations for developing sustainable habitats and vibrant communities. 19

25 References

26 Real Estate Advisory Practice Team CoE Puneet Bhatia Madhurima Basu Anwar Khan Abhinav Jindal Neharika Nawapet Tanaz Tantra Mahima Verma Rishi Bhargava Disclaimer The contents of this newsletter is based upon our research material available in public domain and the sources referred herein and it should not be shared to any persons and to be relied without the prior consent of Edelweiss, and in no event Edelweiss shall be liable for any consequential incidental or punitive losses, damages or expenses, whatsoever on account of reliance by any person on the contents of newsletter. 21

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