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9 SEP 2019

Can India really provide "Housing for All"?

Indian prime minister Narendra Modi's campaign pledge to build 20 million affordable homes by 2022 is faltering. Managing Director and CEO of HDFC Capital Advisors Vipul Roongta asks, what's needed to get it back on track?

Fuelled by rapid urbanisation and a booming middle class, India has a huge pent-up demand for affordable housing. To make up an estimated shortfall of 20 million homes, prime minister Narendra Modi launched a scheme in 2015 called "Housing for All by 2022".

As part of the scheme, the government has implemented several policy initiatives to make housing affordable for the larger Indian middle class. Perhaps the most important of these is the Real Estate (Regulation and Development) Act. The act imposes financial and even criminal penalties on developers if projects are not delivered in a timely manner; prohibits developers from starting sales without the correct permits; and requires 70% of sales collections to be deposited in an escrow account, to meet project expenses.

The administration has rolled out other measures such as a government interest subsidy for home buyers; income tax exemption for affordable housing projects; and an increase in floor-area ratios, resulting in a lower effective price per square foot of land. In spite of all these measures, analysts forecast that the gap between demand and supply is widening.

The "Housing for All" scheme has set 2022 as the deadline because that's the year India celebrates 75 years of independence. But the country faces ongoing obstacles in its quest to meet that target.

One of the key challenges is the current lack of flexible, long-term capital. Banks in India are prohibited from providing finance for land acquisition, or to projects without development approvals. As a result, there is a large funding gap for developers seeking to increase their land bank. Holding costs are high during the sometimes lengthy period needed to obtain approvals. It's tough to refinance high-cost capital.

Closing the gap

A potential template for financial companies to follow can be found in the $1.1billion private equity fund that HDFC Capital Advisors has recently established, which seeks to address the demand-supply gap through a combination of funding, partnerships and technology.

The fund will provide long-term, equity and mezzanine capital to developers at the purchase or pre-approval stage if they commit to building affordable housing. Developers who partner with HDFC will have access to long-term capital, and be encouraged to create their own operational capabilities in areas such as design, technology, project management, sales and branding. A mentoring programme to partner with and invest in proptech companies will help drive innovation within the affordable housing ecosystem, creating efficiencies and lowering costs at each stage of the development cycle.

But solutions to the affordable housing shortage cannot come from the private sector alone. There are extreme infrastructure challenges both in rural and urban areas. The adequate provision of water, transport, sewerage and power is a pressing issue; as is the painfully slow planning system. The government needs to streamline the process of obtaining approvals for construction, as delays result in substantial cost overruns. The concept of a "one-stop shop" for clearances is widely recognised as an effective tool.

Ironically, there is also a substantial amount of existing housing that remains unsold. Buyers lack confidence in the ability of developers to complete projects, which has adversely affected cashflow for projects that are already under way. That is the main constraining factor on housing development right now; government support is required to kick-start these stuck projects and restore customer confidence.

There is no denying that the development of affordable housing in India has gathered momentum in the last four years. But equally, there is still a lot of work to doby 2022, and beyond.

This article originally appeared in the Modus Asia-Pacific edition, Q3 2019, under the headline 'Deconstructed: Housing for All who can wait'