October 6, 2017
Housing For All by 2022 has been the Indian government’s declared objective
Infrastructure status has been forwarded to investment in affordable housing
The Government has offered a slew of incentives to bring down borrowing costs
Fresh PPP initiatives has been taken up to drive activities in the sector
A slew of sweeping government initiatives are set to usher in a structural change in the real estate sector in India. The Real Estate Regulation Act, passed last year, promises to bring about much-needed transparency in the sector and will lead to industry consolidation, weeding out weaker and disreputable players while protecting consumers. Furthermore, introduction of the Goods & Services Tax will lead to more transparent funding.
The most important initiative has been on affordable housing, part of the government’s objective of ensuring “Housing for All by 2022”. The aim is to go in for partnerships with private developers. The main initiatives include:
Moreover, in order to make it easier for households to go in for affordable housing, the government has announced a 6.5 per cent subsidy on interest on housing loans up to US$9,230 which can be availed for 15 years. The government has also offered assistance of around US$2,300 for each beneficiary from the low income group. Additionally, a 4 per cent and 3 per cent subsidy on interest for loan amounts of US$13,840 and US$18,640, respectively, has been offered. The middle-income group of buyers with annual incomes of between US$9,230 and US$37,690 are also included in the interest subsidy.
Further, the introduction of REITs (Real Estate Investment Trusts) will allow retail investors to participate in investments in the real estate sector. The recent Securities and Exchange Board of India’s (SEBI) decision to allow REITs to raise debt capital by issuing debt securities will add more funding avenues for them. These initiatives will be supported by the falling interest rates in the economy. Interest rates on housing loans have been slashed by all the major lenders, including State Bank of India and HDFC Bank.
All these measures have led to increased foreign direct investment in the real estate sector. Real estate industry body CREDAI estimates investments of around $7 billion in 2017. The bulk of the new investment in the first quarter of 2017-18 has been in the affordable housing segment. Industry numbers indicate that while the overall number of new housing units was lower in the first quarter of 2017-18 than in the same period of the previous year, the number of new units in affordable housing grew by 10 per cent.
The government has recently introduced eight PPP (Public Private Partnership) options for the private sector to invest in the affordable housing segment. Six of these options include promoting affordable housing with private investments using government land. A few of the models include allocating government land to private firms based on the least cost of construction. Two options involve extending central assistance per house to be built by private builders even on private land as interest subsidy on bank loans in upfront payment under the Credit Linked Subsidy Component (CLSS) component of the Pradhan Mantri Awas Yojana (Urban).
Foreign investors are already present in the real estate sector in a big way. Investment banks and private equity funds such as Blackstone, KKR, JP Morgan and Morgan Stanley, pension funds such as the Canada Pension Plan Investment Board are investors in the sector.
The affordable housing segment too has started attracting investor interest. In recent times, Shapoorji Pallonji Real Estate has bought 20 acres in New Delhi to build a 2 million sq. ft affordable housing project. Recently, Qatar Holding Llc has committed to invest $250 million in Arthveda Fund Management Pvt. Ltd’s new Affordable Housing Fund. Kotak Realty Fund is also in the middle of raising a new US$100 million affordable housing fund. The interest is not surprising, as rating agency Ind-Ra estimates the affordable housing finance sector is likely to attract INR200 billion (US$3 billion) of equity over FY 2017- FY 2022.