Affordable Housing - A wave that might change Kerala's real estate future

When real estate developer Xrbia recently launched a 170-acre housing project in Hinjwadi, a suburb on the outskirts of Pune in Maharashtra, all the 3,400 apartment units were sold within a week. The biggest unit in this apartment complex was 550 square feet and the smallest was close to 250 square feet. The units were priced at Rs. 22 lakh (around US$40,000) and Rs. 9 lakh (US$ 16,000) respectively.

Could similar affordable housing projects mean the new dawn and wave of reality that could change Kerala's market landscape in the time to come?

Definition of Affordable Housing

When we say affordable housing, we mean homes which cost less than US $40,000 or less than 23 Lacs (in the current scenario). The example above shows the demand-supply gap in the affordable housing segment in India]. People sometimes physically queue up under the sun to apply for allotment of these houses. The ministry of housing and urban poverty alleviation (MHUPA) defines affordable housing for the middle-income group and below as one where the equated monthly installment (EMI) or rent does not exceed 30%-40% of a resident's gross monthly household income.

Whatever the definition of affordable housing, no one disputes that there is a huge shortage in this segment. A report by global property management firm Jones Lang LaSalle (JLL) points out that according to MHUPA, the shortage of urban housing in India at the end of the 10^th Five-Year Plan [2002-2007] was around 27.1 million dwellings to serve 66.3 million households.

How do you make this dream a reality?

Public Private Partnership

One of the ways in which housing can really be made affordable is through the public-private partnership. This is a good model to cater to the housing needs at the bottom of the pyramid but this is not the way it is happening at present. Traditionally, the big developers in Kerala and all over India have focused on the high-end and upper-middle segments of the housing market as these fetch high margins. The slowdown of 2008-2009 was a wake up call for developers when the market for high-priced homes contracted, and many companies saw an opportunity in lower-income segments.

Leading developers like DLF, Unitech, Tata Housing, Purvankara, Omaxe and others announced new projects in the Rs. 20 lakh per unit category across India in the last few years. With more developers entering this field this has got to be the sunrise sector and we expect it to increase multiple times.

Affordable homes can give good returns to Developers

Developers need to buy land on the outskirts of the cities because it is cheaper there. More importantly, they need to treat this land as inventory. Cycle times must be short and all the units must be sold and constructed at one go. Further, the units need to be small in size and well designed for efficient use of space. Done properly developers can get decent margins of around 20% while the IRR [internal rate of return] can be as high as 40% for these projects.

To net this out if the government takes the initiative to remove the roadblocks, the segment could move to the fast track. If infrastructure is developed outside the city limits, then the market forces will ensure steady supply and ensure that affordable homes turn into reality and a new wave of the future in Kerala.