Less headroom for affordable housing
The affordable housing segment continues to be an unattractive proposition, both for the buyer and seller. The main villain here is the pricey home loan rates after the spate of interest rate hikes by the Reserve Bank of India (RBI) since May 2022. Moreover, it does not help that one of the impacts of the pandemic was that the purchasing power of prospective buyers for affordable housing took a severe hit.
Unsurprisingly, amid a high inflationary environment, with declining demand, the share of affordable housing in overall residential real estate sales has shrunk to 20% in H12023 from 31% in the same period last year, showed data by Anarock Property Consultants. In calendar years 2021 and 2022, this measure was at 37% and 26%, respectively.
The sluggish performance of the affordable housing market is in contrast to robust sales in the luxury and premium segments. This trend has reflected positively in the earnings performance of listed realty firms in recent quarters.
As such, buyers in the affordable housing segment remain highly sensitive to interest rate movements. Sure, RBI has hit a pause on interest rates lately, but the damage to consumer sentiment is already done. Also, with retail inflation above the central bank’s comfort zone, rate cut expectations have been pushed further.
“Our recent research indicates that affordable home buyers have been paying almost 20% more in their EMIs over the last two years,” said Anuj Puri, chairman at Anarock Group. Note that floating interest rates for home loans up to ₹30 lakh has jumped from 6.7% in mid-2021 to nearly 9.15% currently.
From a developer’s perspective, elevated cost of land acquisition, especially post covid, and rising construction costs make affordable housing a less viable option. The segment has low margins and generating profit is challenging. Also, any delay in project delivery would increase cost burden for the developer.
“For the developer, the return on investment on affordable housing is comparatively lower; margins are generally 10-15%. Also, offloading inventory in this segment tends to take longer than others. In other categories, the builder can take price hikes in a supportive market but in this category that is difficult,” said Vivek Rathi, director-research at Knight Frank India.
In this backdrop, developers are increasingly focusing on the mid and premium segments where demand is relatively on a solid footing and has better financial prospects. Among the key listed developers, Macrotech Developers Ltd and Sunteck Realty Ltd have some exposure to the affordable housing segment; however, they are now more focused on mid and premium segments, which have better margins and pricing outlook, said analysts.
The RBI is widely expected to maintain a status quo on rates in the near term. This means home loan rates would stay elevated. Thus, affordable housing sales would continue to languish in the coming months. Unless, the government intervenes with some schemes to augment sales, particularly in this category. After all, affordable housing hogged the limelight after the Pradhan Mantri Awas Yojana was announced in 2015.
Puri said one of the solutions is to revise the price bandwidth for homes which qualify for the government’s various incentives to affordable housing buyers. “The current ₹45 lakh limit means that buyers cannot look anywhere within the city limits but must turn to the infrastructure-deficient far suburbs,” he added.
Apart from that, the approval process for affordable housing projects could be further streamlined or more tax incentives can be given to developers. Still, a meaningful revival could be a long-drawn process. In the interim, any new housing scheme announcement by the government could augur well.
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Updated: 31 Aug 2023, 10:51 PM IST
