Affordable Housing – A Second Look At Budget 2014...
By Mr. Sachin Agarwal, CMD – Maple Shelters
Over the past decade, the construction industry has been hit
hard by economic slowdowns and extreme market fluctuations. Construction
and infrastructure play a significant role in a country’s economy, but rigid
contractual policies and very high construction costs (among other factors)
have been constricting the growth of this sector in India.
Needless to say, growth in construction in infrastructure will
not only result in more connected, streamlined and future-ready cities - it
also means the creation of millions of new jobs and overall growth of the
economy.
The new government did attempt to provide increased impetus to
the construction and infrastructure sectors with additional allocation to
infrastructure projects in the recent budget.
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| Sachin Agarwal, CMD – Maple Shelters |
However, sizeable budgetary allocations are nothing new in
the Indian context. Everything looks good on paper until the funds for large
projects hit bureaucratic hurdles on the road to implementation. Considering
its complexity, clearing the opaque jungle of red tape that has been created in
India over the decades is in any case not an easy task even for the most
determined government.
Cost of
construction materials
If viewed from a market-level perspective, Budget 2014 has in
fact not delivered any tangible means to reduce construction costs.
The cost of construction materials has been increasing at a rate
of 15-16% over the past three years, and this has seriously impeded developers’
ability to generate sufficient profits to launch new projects.
While this does not significantly impact larger developers who
tend to launch residential projects for the mid-income and high-income segments
of buyers, it is a challenge to smaller developers who typically cater to the
needs of home buyers with smaller budgets.
In other words, the high cost of construction remains a serious
challenge to the affordable housing sector.
The factor of high construction costs continues to be at odds
with the new government’s focus on proving housing for all by 2022.
National-level developers will doubtlessly benefit from the recent budget
loosening the norms of foreign direct investment into the affordable housing
sector. This is because, thanks to their larger land holdings and financial
positioning, they will be able to meet the minimum area norms and
capitalization criteria required by the FDI policy.
The FDI aspect for affordable housing is more or less geared
towards large-scale development undertakings, often involving slum
rehabilitation in the larger cities.
However, the biggest suppliers of budget housing in India have
always been the smaller players. Because of the high land costs, the projects
launched by these developers tend to be small and therefore of no interest to
foreign institutional investors.
These low-key developers will therefore not benefit from the
relaxation of FDI norms into affordable housing projects, and continue to
suffer from ever-escalating construction costs.
The one glimmer of hope on the horizon is the budget’s
allocation of Rs. 40 billion towards low-cost housing schemes. However, no
clarity has so far been offered on what categories of developers will be
benefited, and what the qualification parameters are.
This allocation is basically compensation to the NHAI for the
loss it incurs in the process of providing incentives and developers of
affordable housing. However, incentivization takes place at a local level and
depends on locally-decided parameters.
For example, in a state like Gujarat (which already has very
proactive policies for affordable housing) the benefits of this allocation will
be more uniformly spread across stakeholders. This does not mean that all
developers of affordable housing in other states will be equally benefited.
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