How to tackle India’s affordable housing challenge

In India’s rapidly developing cities, affordable housing is in chronically short supply.

At present there’s a shortage of 18 million homes across the country of which 15 million are needed for low income families earning less than 16,000 Indian Rupees ($250) a month.

As slums and unplanned real estate spring up, the housing shortfall is having significant repercussions on India’s new city dwellers and the way its cities are developing. “Large-scale affordable housing in cities is the greatest necessity of urban India today,” says Anuj Puri, Chairman and Country Head for JLL India.

Urgent action is needed yet, as Puri points out, large-scale urban developments are becoming increasingly difficult due to a lack of available land, congested transport routes, a lack of finance, rising costs and regulatory hurdles.

And initiatives such as the Real Estate (Regulation and Development) Bill 2015, may make the country’s property market more transparent but “there is not much focus either to promote or incentivize affordable housing,” says Subhankar Mitra, Local Director and Head of Strategic Consulting (West India) at JLL India.

Still, the Modi government has big plans to provide housing for all Indians by 2022. It recently announced that 2,508 cities in 26 states have been selected under ‘Pradhan Mantri Awas Yojana’ for providing affordable houses to low income families.

Creating incentives in the market

Developers are active in the affordable housing space but investment remains thin on the ground. The World Bank’s private arm, the International Finance Corporation (IFC), recentlyagreed to invest up to $38 million in several affordable housing finance firms along with a $30 million injection in Shapoorji Pallonji & Company for the development of affordable housing projects.

However, mainstream private equity investors have stayed away from affordable housing citing thin margins. “The developer is a commercial entity,” explains Mitra. “They will undertake only those projects which are financially viable. They will not undertake any project under social obligation or as a part of national mission.

“The agenda has to be aligned. Therefore we have to create a mechanism and environment where houses for even low income groups become commercially viable,” he adds.

Availability of land has been a persistent bottleneck. Faster and smoother processes for land acquisition and approval, for example, could enable developers to churn out units under a pre-determined price. “The cost of land should be kept as low as possible so the overall cost of the product comes down. Also, we have not really explored green tech or advanced tech in this segment which can provide much cheaper cost for housing,” says Mitra.

Schemes taking shape

Ever since the first National Housing Policy in 1988, the government has tried to reform the housing and real estate sector yet many affordable housing schemes have underachieved.

But now more public-private partnerships are in the pipeline. In the state of Maharashtra, for example, the government is looking to build 1.1 million houses in partnership with the private sector and with support from the World Bank. Meanwhile, Shapoorji Pallonji Group plans to build 20,000 affordable homes in seven years across several cities under the brand Joyville.

Attibele, 35 km from Bangalore, is emerging as an affordable housing hub. Tata Housing, VBHD and CSC Constructions are among those that have either announced projects or are looking for land, driven by its proximity to Bangalore and the availability of affordable land.

Taking a new approach

There’s more that could be done, says Puri. India’s authorities could also take steps to encourage the development of the sector such as including mass housing zones in city master plans, improving systems around the keeping of land records and implementing efficient dispute redressal mechanisms.

“Market-based solutions for the housing problems can only go so far. There has to be adequate amount of public housing as well, which means housing stock created by public bodies and public agencies and similar other bodies at city or state or other such levels,” says Mitra.

And innovative thinking is needed to address the challenges facing India’s low income workers. As the supply side of India’s housing market is currently skewed toward middle income to upper middle income group, low income workers are particularly vulnerable. Many don’t earn a regular salary.

“Many of them are either self-employed or doing odd jobs. So it becomes difficult for the finance corporations or housing finance companies to fund them,” says Mitra. “Instead, one of their few options are micro-finance institutes which are not currently focused on the housing sector.” He believes new policies are needed to make innovative financing models – such as micro mortgages – and flexible payment options readily available to low income groups.

Borrowing ideas

India is far from alone in dealing with effects of large scale migration. However, countries like China have successfully implemented mass housing plans. For example, Shanghai has adopted four approaches to affordable housing for different types of residents — low rent housing, a public rental housing system, houses on shared ownership, and houses for people relocated from old dilapidated buildings.

Indonesia pursues a National Housing Policy that involves cross subsidies that actively encourage private firms to build a set number of low cost houses for every luxury home they build.

In contrast, Mumbai, which is one of the world’s most expensive real estate markets, only provides free housing to slum dwellers and builds few low-cost houses for the general public. And across India thousands of low-cost homes are lying vacant due to their location far from the cities and lack of infrastructure.

As India’s population continues to grow and more people move to its cities, affordable housing is going to become ever more important. Only by getting the foundations right now can the country cope with future pressures of rapid urbanization.