Poll doles pouring: Now a makaan plan from Maken

With a shortfall of 18.78 million homes in the country, mostly in the low-income category, the UPA government, taking cues from its Ghar Nu Ghar affordable housing scheme for women in Gujarat that saw nearly 28 lakh women sign up, is now cashing in on the need for affordable housing in the run-up to the general elections in 2014.

Rather than empowering rural areas and develop planned cities, the Housing and Urban Poverty Alleviation Ministry is planning to launch a housing scheme for the urban poor which will include building high-rise apartments for the urban poor on land owned by central agencies such as the railways and defence as well as slum eradication or improvement of slums, an Economic Times report pointed out today.

The Union Minister for Housing and Urban Poverty Alleviation Ajay Maken wants to start the Jawaharlal Nehru National Urban Renewal Mission (JNNURM) Phase II and the Rajiv Awas Yojana-II in the next financial year and is expecting around Rs 70,000 crore for the two schemes during the 12th plan.

More from Economy

Inflation likely to be a big focus area for budget 2024, say sources Explained: Will the Bank of Japan break tradition and raise interest rates?

In an interview with the Business Standard, Maken suggests that builders should utilise land on the outskirts to provide affordable housing because it is cheaper there.

[caption id=“attachment_562871” align=“alignleft” width=“380”]  Rather than empowering rural areas and develop planned cities, the Housing and Urban Poverty Alleviation Ministry is planning to launch a housing scheme for the urban poor[/caption]

But what is even more important is how they treat this land. Rather than treating it as an asset (where builders buy land and hold it until prices appreciate so that they can inflate the cost of flats) they need to treat this land as inventory. Cycle times must be short and all the units must be sold and constructed at one go. Hence rather than worrying about margins, developers should think about volumes.

But according to a recent Jones Lang LaSalle report on affordable housing, private developers primarily look at luxury, high-end and upper-mid housing segments as these fetch a premium vis–vis the affordable housing units.

This is because state laws limit floor space index levels, and high real estate rates in cities have actually made affordable housing unviable for builders. For Maken this is a state-specific problem. “Land and colonisation are a state subject, so states need to come up and discuss it with developers, so they can free land with high FSI,” he told the newspaper.

What he failed to acknowledge was the absence of infrastructure in the outskirts. Without proper infrastructure in place, real estate on the outskirts will only serve the purpose of investors as no end-user will live there. So isn’t the government’s own policy coming in the way of affordable housing?

But in order to make low-cost housing more viable, at least the RBI has taken a step forward and allowed developers and housing finance companies to raise up to Rs 5,400 crore external commercial borrowings route.

The funds raised through ECBs could be used either for developing low-cost housing projects or for providing loans up to Rs 25 lakh to individuals for buying units with a price tag of Rs 30 lakhs or less.

However the real challenge is in managing currency risk as these projects may not have natural hedge without foreign currency income. Also, there are certain requirements which need to be fulfilled before availing this facility.

For instance, the developers should have a minimum five years of experience and they should not have defaulted on any previous bank obligation. Also, the project should not have been involved in any sort of litigation. Lastly, it should also have all the clearances in place.

Given that most Indian realty biggies are involved in some form of litigation at any given point of time, the ECB route will be available to very few builders. Also in a country where approvals take at least two to three years due to the lack of a single-window clearance route, most projects will not make the criteria.

And last, if interest rates rise by the time the project is complete (which may typically take 2-3 years) the cost of the project increases.

“Even if you bring ECBs, then cost of that will not be less than domestic debt because of hedging costs. Real estate does not have natural hedging unlike IT where you earn in dollars. But sectors such as real estate, you need to buy dollars to repay loans. In that case, you are exposed to currency fluctuation risks,” Ambar Maheshwari, managing director, corporate finance, Jones Lang LaSalle, a global consultant was quoted as saying in another Business Standard report.