Homes for All: Private sector participation in the affordable housing segment

Private sector participation in the affordable housing segment

In September 2017, the Ministry of Housing and Urban Affairs announced a new public-private partnership (PPP) policy with an aim to promote private sector investments in the affordable housing segment. The new policy was drafted with the aim to minimise risks ass­ociated with land, financing and capital investments, maintenance, and recovery of the capital invested. The policy has been in line with the government’s Housing for All, 2022, initiative, and seeks to assign risks among various stakeholders, besides leveraging underutilised and unutilised private and public land to meet the target. Further, the policy allows private de­velopers to construct houses on government’s own land, seek benefits under the Pra­dhan Man­tri Awas Yojana-Urban, and avail various ex­emptions and concessions.

Under the policy, the government has proposed ownership and rental models backed by an institutional structure. The aim is to ensure that the right kind of housing is available to end users/beneficiaries. The policy emphasises the utilisation of government land to develop affor­dable housing units. This is a lucrative option for private developers, as it spares them the complications related to land titles and from making investments to purchase land. That said, land continues to be a state subject.

Key announcements

Sunteck Realty is planning to invest around Rs 600 billion to develop three large affordable housing projects spread over 250 acres in the Mumbai Metropolitan Region by 2026-27. Two of these three projects, spread over 100 acre land parcels in Vasai and Vasind near Mumbai, were acquired during the pandemic, while 150 acres is part of its Naigaon project.

The listed information technology company Aurum PropTech, controlled by realty developer Aurum Ventures, will be investing over $5 million through a mix of debt and equity capital infusion in rental management platform The­House­­Monk, owned by Monk Tech Labs.

Reportedly, Smartworld will invest Rs 12 billion in developing two residential projects in Gurugram.

Mahindra Lifespace Developers Limited announced that it will invest around Rs 5 billion to build a new housing project in Pune. The com­pany will develop more than 1,000 units in the project Happinest Tathawade, spread over nearly 7 acres of land. The project will be de­veloped in two phases, with the first one comprising over 600 apartments. Possessions for the newly launched Phase I should begin by mid-2025. The company expects around Rs 75 billion of sales revenue from this new project.

Issues and challenges

Even though the PPP policy is a step in the right direction, there still exist several vital issues, ranging from regulatory challenges to demand-side factors, that must be resolved to encourage the private sector to take up affordable housing projects in partnership with the government. PPP models, if explored efficiently, can result in a win-win situation for all involved, and encourage private participation. The success of the PPP policy will depend on proper im­plementation, fast approvals and transpa­rency in the system.

As per the policy, private players will be encouraged to develop affordable housing th­rough a variety of financial and non-financial support measures and cross-subsidised models. However, the pace of project execution continues to be excruciatingly slow in India, on account of constraints such as lack of developable land at reasonable prices, higher construction costs and unsupportive development co­ntrol norms. The stalling of such projects lea­ds to further erosion of margins, thereby making these projects riskier propositions.

The way ahead

Affordable housing offers low profit margins and thus has traditionally been a less attractive venture for developers and private players. However, with a high margin premium segment growing at a sluggish pace in recent years, developers are turning to affordable housing in a big way.

Further, in a bid to reduce the capital and acquisition costs of land, developers in the sector are moving towards far-flung or peripheral/ tertiary areas. And as there still exists a huge lack of external trunk infrastructure, social in­fra­structure and organic infrastructure in the­se areas, this conflicts with the idea of aff­or­dable housing. This is proving to be an impediment to the sector’s growth.

Going forward, a working capital model has to be followed for the affordable housing segment, wherein assured and faster cash inflow from sale receipts fund the construction of projects. The developer needs to de-risk themselves with respect to the cost of land acquisition. Despite the high rate of returns achieved by undertaking these measures, unavailability of land at suitable prices and locations, the low ab­solute value of returns and the lack of fin­ancing to undertake large-scale mass housing projects could prevent several developers from entering the segment.