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Infra boost for affordable housing written by Neeraj Bansal, published in Hindustan Times. July 7, 2014

In the Indian context, affordable houses refer to houses which are within the reach of economically weaker section (EWS) and lower income group (LIG) sections of the society. These houses are generally 260 to 600 sq ft in size and cost up to Rs 10 to Rs 12 lakh (three to four times of the annual income of EWS/LIG households). The monthly rent of such houses is not more than Rs 5,000 per month.


Affordable housing has traditionally remained a domain of the government. Private sector participation has been limited. Thanks to issues such as land availability and pricing, project approval processes, and limited access to credit by developers and home buyers, affordable housing projects have remained uneconomical.


Considering the present situation, there is a shortage of 1.9 crore houses in urban areas, and there is likely to be a need for 2.7 crore more houses by 2022. Meeting the current deficit and developing sufficient housing stock for the future would require investment of about US$1 trillion by 2022. Such a huge investment cannot be met by the government alone and thus, private sector participation needs to be incentivised.


Though the new government has taken strong steps to encourage private sector participation in the recent Budget, it ignored the demand for granting ‘infrastructure status’ to the affordable housing sector. Granting infrastructure status to the affordable housing sector would allow developers to avail tax and non-tax benefits and lower funding costs which are available to other infrastructure sectors in general. Currently, it is estimated that various indirect taxes account for about 35% to 40% of the housing cost, which are passed on directly to the consumer. Additionally, the funding cost in the real estate sector (about 18% to 24% per annum) is almost double compared to that of the infrastructure sector. Granting infrastructure status would help rationalise these costs which in turn would make the affordable housing sector a viable business option for developers.


Recently, Reserve Bank of India (RBI), has introduced a reform which has eased long-term fund raising for lending to infrastructure projects and included lending to affordable housing loans (below Rs 50 lakh in metro cities for housing that cost up to Rs 65 lakh, and Rs 40 lakh for houses that cost up to Rs 50 lakh in other areas), along with infrastructure projects. This reform is expected to reduce interest rates on housing loan which may stimulate housing demand and boost individual savings. However, RBI has not allowed banks to extend such funds to developers directly as commercial real estate loans (lending to developers) are categorised by RBI as high-risk, which limits banking sector lending to real estate sector.


It is expected that clearance of the pending Real Estate Regulation and Development Bill, 2013 (RERA Bill), which seeks to establish a real estate regulator in each state, could help improve transparency and governance in the sector and allow RBI to remove commercial real estate loans from high risk category. The developers lobby has welcomed the RERA Bill, but have suggested some changes to make it holistic.


It is recommended that the RERA Bill be cleared by the Government after consulting real estate sector stakeholders. Additionally, there are a few recommendations listed below, which could help boost the affordable housing stock in the country: Streamline approval mechanism of projects by introducing online single window clearance system Improve access to credit by urban and rural poor by strengthening the micro-finance sector.


(The author is partner and head of real estate and construction sector, KPMG in India)


(This article was published in Hindustan Times (HT Estate) on 27 July, 2014)