Why Private Sector is Vital in Addressing the Urban Housing Need of 15 million Homes

Housing for the poor and low-income households in urban India has failed to keep up with our rapid urbanization. The government estimates a shortage of more than 18 million houses, primarily among the EWS and the LIG (economically weaker sections and low income groups). We estimate that even among urban low-income families, with a monthly household income of between Rs 10,000 and Rs 25,000, a large proportion are living in cramped, substandard housing with limited access to civic amenities; often it is rented accommodation. We estimate there is a need to create 15 million houses for this group.

The government has been using multiple approaches to bridge the housing gap- constructing houses, upgrading slums, rehabilitating slums, mandating private sector projects to have reservations for EWS/LIG housing, etc. Unfortunately the housing created through these approaches has not been able to meet the need and there is a growing interest and need to involve the private sector to help bridge the gap.

Housing Finance Boom

Our State of the low-income Housing Market report last year highlighted that roughly 78,000 houses costing sub-Rs 10 lakh have been developed in over 130 projects in 22 cities across India by private developers on private land without significant assistance from government. A key element of this success has been the emergence of over 10 housing finance companies that are providing housing finance to formal and informal (no proof of income) lowincome customers.

We interviewed 27 of these low-income housing (LIH) developers, and most of them were small to medium regional developers. The large majority (86% of them) expressed satisfaction with the margins of their business and 90% intend to continue to build LIH. Most projects would sell 80% of their units within 12 months demonstrating the robust demand. Top three challenges cited by developers are increasing land prices, increasing construction costs and long approval timelines. The new housing finance companies (HFCs) were also very satisfied with their business (growing disbursals at 100-300% per annum and having near zero NPAs).

The government can address many of these barriers and provide a pucca house for all by using three approaches in parallel:

Catalyzing the Market: A large part of the low-income segment can be served by private developers and financiers; the government only needs to put conducive policy and regulations in place. These include:

Enabling supply of housing by providing fast and time bound approvals for LIH.
Developing infrastructure to increase supply of affordable and serviced land (eg: the Ring Road in Ahmedabad and good road connectivity to Indore city centre have boosted housing supply on these roads).
Earmarking serviced land for EWS and LIG housing in city development plans.
Classifying debt to HFCs that is lent to low income customers as priority sector lending (as this will address the access and cost of debt issues for the HFCs).
Waiving stamp duty and registration fees for end customers only.

Increasing the affordability for a customer by an interest rate subsidy: The government already has a scheme that does this; the Rajiv Rinn Yojana provides a 5% interest rate subsidy for loans up to Rs 5 lakh for LIG customers; the government just needs to rapidly facilitate its deployment.

Controlling prices: Poorer customers like EWS customers may not be able to afford housing despite the measures taken to catalyze the market and increase affordability. The government would have to directly control price and beneficiary (to avoid misuse) to enable EWS customers to buy houses.

While FDI has been relaxed, most of the development seen in this sector is by smaller developers who typically won ft have access to these funds. Rs 4,000 crore offered to National Housing Bank should help in reducing financing costs for customers, but the impact will be limited as the key challenge is the supply of housing. Overall pucca houses for all and recent announcements signal good intent, but the government needs to actively work on providing an effective regulatory and policy environment to stimulate more housing supply and realize the dreams of millions of its citizens to own a home.

Case Study: Rajasthan’s Novel Approach to Involving the Private Sector

The model is of particular interest as it has been designed to incentivize the developer to build housing for EWS/LIG/MIG segments on his own land. In this model the developer contributes 52% of his land for low-income housing and builds flats that the government allocates to prequalified customers. The government covers a large part of the construction cost, gives free floor space index (FSI) to make up for the land contributed and gives an additional FSI of about 2 on the 48% of the land the developer keeps. Furthermore, a lot of this FSI can be transferred to other parts of the city. The government also makes sure the housing is in good locations by pre-signing customers for the project before giving the developer the final approvals!

To ensure smooth execution, the government provides fast-track approvals and has created a dedicated nodal agency, Rajasthan Avas Vikas and Infrastructure Limited (RAVIL), to manage and co-ordinate with ll stakeholders. It has even created a reserve corpus fund to ease working capital concerns of developers.

This model has resulted in 13,000 houses in the first phase of its implementation. In the second phase, 24 projects with a total of nearly 21,000 houses have been approved.

This article originally appeared in the Economic Times on 10th August, 2014. The original article can be accessed here.

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