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A Sense of Understatement: Modular Construction and Indian Real Estate

October 08, 2018

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Mitsubishi Corporation announced this month its first ever investment in Indian Housing: it will invest $25 Million in Chennai through its subsidiary DRI India and plans to build 1,450 new homes on a 186,000 square meter site. And as if you needed any reminding of the buoyancy of Indian real estate, three quarters of those units have already been sold. Mitsubishi expects to earn more than 10 Billion rupees on the project within four years so it was probably with a sense of understatement that a Mitsubishi spokesman told the press last week that: “…middle-income earners (in India) are expected to expand, boosting housing demand.”

No prizes for original thinking there.

The United Nations has repeatedly forecast that the subcontinent’s current population of 1.3 Billion will overtake China by 2022, making it the most populous in the world so yes, middle-income earners on the subcontinent are indeed “expected to expand”…and how. Added to which India is already the fastest growing large economy on the planet, with an increasingly urbanised population so the demand for new homes will indeed be “boosted”. Look no further than the burgeoning conurbations of Mumbai and Bangalore. Mitsubishi might not be winning any prizes for economic analysis anytime soon but its decision to invest in the subcontinent’s real estate sector makes perfect business sense.

Of course, in the overall context of the economic phenomenon that is India, 1,450 homes is a drop in the Ocean. Just to keep pace with current housing demands, the subcontinent needs to build 856 new homes every hour (using up Mitsubishi’s contribution in less than two hours).

And that provides a graphic illustration of why Modular Construction is now at the top of the subcontinent’s political agenda.

Modular Construction is literally changing the shape of the world we live in: not just for homes but hospitals, bus stations and offices too…if it can be built at all, it can be built quicker and more efficiently in a modular format. So if, like India, you need to build nearly 900 new homes an hour, it should be obvious where to look for the solution. Indeed, having announced this week that the United Kingdom Government will commit an additional £2 Billion to affordable housing projects, Theresa May could usefully take a leaf out of Prime Minister Modi’s playbook.

And that’s not the half of it…with recent concerns over air quality in India’s conurbations also making the news recently, modular construction technologies also provide a ready answer to environmental concerns. Its technology eliminates high moisture levels occurring in traditional building materials, with units being constructed off site and indoors well away from adverse weather conditions. That not only protects the integrity of the structure but prevents excess moisture building up in the wooden framing too.

Modulex Modular Buildings Plc is the World’s largest and India’s first Steel Modular Building Company, working to meet the Challenge of India’s urban housing shortages in a practical and focussed manner. It was established by Red Ribbon to harness the full potential of India’s dynamic and fast evolving markets, delivering exciting opportunities for investors because, when it comes to investing on the subcontinent, nobody knows its markets better than Red Ribbon.

Red Ribbon CEO, Suchit Punnose said:

Mitsubishi’s entry into the Indian Real Estate sector should come as no surprise to anyone: major Japanese consortia have been leading the wave of inward investment into the subcontinent in the wake of key initiatives such as Delhi’s high speed rail system. But the article is right to characterise Mitsubishi’s commentary on the strength of the sector as a wild understatement. India is currently the fastest growing large economy in the World, with a burgeoning and increasingly urbanised population that is projected to be the largest on the planet by 2022. That will inevitably make the subcontinent’s real estate market an attractive proposition for any investor.

But none of that should beguile us from forgetting the sheer scale of the housing challenge India currently faces, in common with other leading global economies. Traditional construction technology simply can’t deliver to the scale and pace required by projected demand on existing governmental programmes. No wonder then than Modular Construction is a policy priority for Prime Minister Modi’s Government. It’s only a question of time before others follow suit…

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India’s urban challenge and Modular Construction

August 16, 2018

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We must run as fast as we can just to stay in one place… and if you want to go anywhere we must run twice as fast as that.” (Alice in Wonderland).

As well as having an engaging smile, indeed sometimes only an engaging smile, the Cheshire Cat’s advice to Alice demonstrated wisdom beyond his nine lives. We would be well advised to remember it when considering the real estate challenge facing India’s economy as it comes to terms not only with the fastest growing population on the planet but also a radically increased urban population. Mumbai and the New Delhi Conurbation are already creaking at the seams, so staying in one place is no longer an option: now we need to run twice as fast to get anywhere.

And as we have commented previously on this site, when it comes to sheer speed of delivery Modular Construction will always have the upper hand over traditional construction techniques, making it singularly well suited to meeting the demands of India’s rapidly expanding population. Modular units are pre-built offsite in a controlled environment where the weather matters less and logistical barriers barely matter at all: think about building anything from scratch on site in Downtown Mumbai in the middle of summer and you’ll get some idea of the problem. Just in time supply chain efficiencies, including progressive stacking of modules on site, also then ensure maximum speed of final delivery without any of the “dead time” delays frequently associated with traditional construction methods.

But how does that all work out on complex construction projects? Using Modular Construction to create a small block of flats is one thing, but what about a 100-room Hotel?

Well, as it happens, that’s not a problem either.

The Marriott Hotel Group decided last year to adopt modular construction technology on some of their newest hotels and other major and mid sector hotel chains have been following suit with projects ranging from four star hotels through to boutique eco hotels. Marriott kicked off its initiative with a commitment to build 50 hotels using prefabricated guestrooms and bathrooms as well as a 97 room signature hotel entirely constructed with modular technology (and, take note, completed two months ahead of schedule). As their International Chief Development Officer, Eric Jacobs put it: “Construction is the next frontier for innovation and modular technology is leading the wayBy working with our modular partners we can open hotels faster, put associates to work earlier and generate revenues sooner”.

Quite so…

And its not just hotels either: modular construction is currently being used across the subcontinent to deliver student housing, hospitals and public buildings of all shapes and sizes. Getting just where India needs to be… by running twice as fast.

Red Ribbon played a key role in setting up Modulex Modular Buildings, recognising the company’s outstanding potential to deliver above market rate returns for investors through its ability to tap into high demand levels in Indian real estate markets. The company provides an exciting opportunity for investors to take advantage of this key trend in the fastest growing large economy on the planet.

 

Red Ribbon CEO, Suchit Punnose said:

I was interested to read about the Marriott Hotel initiative because it deals with a misapprehension that I sometimes come across, that modular construction is appropriate only for smaller scale projects. In fact nothing could be further from the truth. From my own work on behalf of Modulex on the subcontinent, I know that this fascinating and innovative technology is equally at home on major construction projects as well including, as the Article says, Hospitals and Schools. I’m convinced the technology has a major part of play in meeting the huge challenges currently facing India’s real estate markets.

And as a matter of interest, Marriott certainly wasn’t the first company to enter the market with a modular construction hotel: Red Ribbon’s own Eco Hotels have been doing that since the company’s inception and I’m very proud of the part we’ve played in its growth: because at Red Ribbon we don’t just believe in the theoretical value of modular technology, we’ve been using it for years.

 

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Taking It In Stages: Modular Construction and India’s Urban Challenge

August 16, 2018

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India’s already congested conurbations will have to find homes for 900 Million more people by 2050, and assuming a modest four person occupancy rate that means 856 new homes will have to be built every hour, every day for the next thirty years (fourteen a minute in case you’re wondering), with the subcontinent’s builders working an implausible twenty four hours a day with no time off. The sheer scale of the challenge is unprecedented, and given the pressures it will place on India’s already overstretched urban infrastructure, it will call for a solution of equally unprecedented ingenuity. But more of that in a moment… first let’s look at those trends in a little more detail.

The latest industry source to address the issue is KPMG in its NAREDCO Study, “Bridging the Urban Housing Shortage in India” (the clue’s in the title obviously) and the Report draws an arch reference to commentators having first predicted a critical shortage of urban housing as long ago as 2012, with a then projected deficit of 18 Million units. But things have got worse since then and KPMG now say there are some 1 Million urban households currently living in “non serviceable accommodation” and over half a million without any homes at all. So what’s to be done?

Well, the first point to make is that it would be unduly Eeyorish (with apologies to Philip Hammond) for us to ignore the work Prime Minister Modi’s Government has already done to re-vitalise the subcontinent’s Affordable Housing Programme: introducing a raft of new tax incentives over the course of the last two Union Budgets with more streamlined Planning Procedures thrown in for good measure and a general cutting of Red Tape across the board. Which is, of course, all well and good but cutting Red Tape and going Fiscal Max won’t get any homes built by themselves. Something more is obviously required.

KPMG’s Director of Real Estate on the Subcontinent, Neeraj Bansal, more or less put his finger on the solution when he highlighted that the single most important policy initiative which has so far gone largely unexplored is the use of innovative and low cost technologies which can speed up the construction process: and that means Modular Construction.

Prefabricated units are, indeed, likely to be key to delivering affordable housing on the required scale and within cost structures optimum to the framework of incentives put in place by Prime Minister Modi’s Government. Modular Construction has a real potential to overcome all of the structural barriers to volume delivery at pace which are inherent in India’s traditional building technologies: including a lack of skilled construction workers (or at least skilled in sufficient numbers in the urban areas where they are required); a pressing shortage of non land resources, from precious water supplies to fabrication materials and, most crucially of all, the severe time delays which come hand in hand with conventional construction methods.

Modular Construction ticks all of those boxes.

First of all, it has clear advantages on speed: manufacturing and site work can be carried out simultaneously, reducing overall completion times by as much as 50%. Think about that: for every two hundred traditional units completed, modular construction can build three hundred. And that means reduced labour costs too, with nearly all of the design and engineering overheads being rolled into the bottom line manufacturing process. Roofs, walls and floors can all be constructed as part of the same process when, in stark contrast, ceilings can’t be put in place on a conventional project until the walls are completed, and walls can’t be completed until the floors are laid down: resulting in a lot of workers standing idly by as each small delay in the process dominos into a bigger one. That isn’t the case with modular construction where these same workers can work together at the same time; and they can also be recruited centrally so that local skills shortages (of the kind that have blighted the Mumbai construction sector) also become a lot less significant.

Modulex Modular Buildings is the World’s largest and India’s first Steel Modular Building Company, working to meet the Challenge of India’s urban housing shortages in a practical and focussed manner. It was established by Red Ribbon to harness the full potential of India’s dynamic and fast evolving markets, delivering exciting opportunities for investors through the platform of the Red Ribbon Real Estate Fund: because, when it comes to investing on the subcontinent, nobody knows its markets better than Red Ribbon.

Red Ribbon played a key role in setting up Modulex Modular Buildings, recognising the company’s outstanding potential to deliver above market rate returns for investors through its ability to tap into unusually high demand levels in Indian real estate markets. The company provides an exciting opportunity for investors to take advantage of this key trend in the fastest growing large economy on the planet.

 

Red Ribbon CEO, Suchit Punnose said:

When you come to look at the nuts and bolts of what it will take to deliver on India’s housing targets for its burgeoning urban population, the figures are truly eye watering. Building fourteen new homes every minute for the next thirty years would strain the limits of any conventional construction methods: not to mention the resolve of workers required to put in a twenty four hour a day shift, seven days a week.

But for me the answer is always been obvious and, as the article says, challenges on this scale require groundbreaking and innovative solutions. That solution, I am convinced, is Modular Construction.

No conventional industry methods can beat Modular Construction for its sheer pace of delivery and, of course, the key challenge faced in India and elsewhere is delivery timing: and its low overheads combined with unique operational efficiencies mean it will beat conventional construction methods hands down on overall profitability too.

That in a nutshell is why we have been committed to Modulex Modular Buildings (as a founding partner) since the project’s foundation several years ago. We remain convinced that it will play a vital part in meeting the challenges of India’s housing sector over the years ahead.

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Meeting Need with Speed: Modular Construction as a key innovator

May 02, 2018

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27,348 people live on every square kilometre of land in the Mumbai Conurbation, and this figure is expected to grow to 101,066 by 2020 making it the most densely populated area on the planet. This striking statistic is characteristic of the burgeoning and rapidly urbanised population trends which are currently driving the subcontinent’s economic miracle, but those same trends are bringing their own problems as well: a need to create ever greater numbers of residential and commercial units, quicker than ever before and within the severe constraints imposed by already over populated areas such as Mumbai.

But India is rising admirably to the challenge and Modular Construction is a vital ingredient in its urban planning strategies: prefabricating key components offsite and assembling units within the final urban matrix. The process offers significant advantages over conventional building techniques, with clear advantages both in terms of efficiency and final project costing. Rehabilitation models (re-acquiring units after use) are also faster and more efficient with Modular Construction and it has a much-reduced environmental impact too.

Modular Construction is far from being a recent innovation on the subcontinent: the first prefabricated units were erected in India as long ago as 1905 (with a futuristic turn of phrase they were called “ultra-light constructions”) and in those early years stone and logs were the preferred materials, unlike today’s lightweight steel components. Prefabrication techniques took off later with the foundation of the Hindustan Housing Factory in 1953, designed to meet severe housing shortages arising from the influx of refugees from West Pakistan (now Bangladesh). The Indian Government ran the company then (and still does, as Hindustan Prefab Ltd) manufacturing precast concrete components for later assembly on site in a variety of commercial and residential projects. Tata Steel is also heavily involved in the segment at the moment with its “nest system” of prefabrication, as is Modulex Modular Buildings, which operates the World’s largest (and India’s first) steel modular building facility.

The main advantage of modular construction is of course its speed of delivery, with a unique capacity to meet the tightest deadlines imposed by current trends in Indian real estate markets, whilst at the same time adapting to the subcontinent’s relative shortages in on site skilled labour and other key resources such as water. But its other great advantage over traditional construction methods is durability, adopting strict checking mechanisms at the fabrication stage, which enable units to be customised more effectively to the most demanding specifications. The whole process also requires less labour, so it’s cheaper too.

BIM (Building Information Modelling) is now being used in India to pre-plan and visualise the entire process from drawing board to final assembly, making modular construction a much leaner and more efficient process through maximising pre-loaded work off site; and that’s important on the subcontinent in particular where key resources are increasingly scarce.

Yet another reason why Modular Construction is at the forefront of the clutch of key initiatives currently addressing India’s unprecedented surge in demand for residential and commercial real estate.

Red Ribbon played a key role in setting up Modulex Modular Buildings, recognising the company’s outstanding potential to deliver above market rate returns for investors through its ability to tap into unusually high demand levels in Indian real estate markets. The company provides an exciting opportunity for investors to take advantage of this key trend in the fastest growing large economy on the planet.

 

Red Ribbon CEO, Suchit Punnose said:

We are proud of Red Ribbon most ambitious project and India’s first Steel Modular Building Factory, Modulex Modular Buildings Plc: working from a model which enables prefabrication of high quality units to the most stringent specifications and subject to the rigorous demands of western regulation, it offers significant advantages compared to conventional buildings such as cost effectiveness, flexibility and shorter time production. Modular construction can deliver innovative designs while providing a key solution for the sector.

We believe the company is now exceptionally well placed to rise to the challenges being created through the unprecedented demand within India’s real estate sector, both domestic and commercial. And we are confident too that we will be able to deliver above market rate returns for our investors in doing so, through making the most of the opportunities that these challenges will inevitably create.

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Affordable Housing Programme: the Private Equity Boost

February 20, 2018

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We’ve heard a lot recently about policy announcements made in this year’s Union Budget, but what about the headline announcements from last year; how effective have they been in delivering the radical economic programme currently being pursued by Prime Minister Modi’s Government? Well, the answer seems to be very effective indeed, particularly in the case of one of those flagship policies, the Affordable Housing Programme.

Designed to address the subcontinent’s severe shortage of domestic housing resulting from a burgeoning and increasingly urbanised population, the programme has its roots in pre-Modi Administrations which had made housing for all by 2022 a key policy objective and with it (this is what proved to be the problem) construction of no less than 50 Million new housing units. It was never an especially realistic target given the escalating cost of urban land, which was making development more difficult; a creaking infrastructure system and lengthy delays in the planning process.

Prime Minister Modi’s Government has worked to cut the burden of red tape and, of course, its infrastructure-spending programme has already gone far beyond the wildest imagination of even the most cynical observers. And then, finally, to ease the fiscal difficulties of price gearing on new urban developments, last year’s Union Budget introduced a 6.5% subsidy for the poorest buyers combined with a licence to take the entire subsidy on a twenty year loan up front (so making the property more affordable) and then allowing withdrawals from EFPO of up to 90% of the purchase price (with the same effect). And then, most importantly of all, affordable housing was given infrastructure status meaning that the cost of borrowing for developers was radically reduced.

So, has it all worked? Have these initiatives actually attracted the type of long term real estate investor, prepared to commit to a lengthy development cycle of the kind inevitably required to provide much needed new homes?

Of course this type of investment, long term and short term shock resistant, has a name: we’re talking about Private Equity investment, and given the past year has seen a remarkable resurgence of Private Equity investment into affordable housing projects, the answer to our question has to be…yes: last year’s Union Budget has made a considerable difference.

The level of overall Private Equity interest, already strong in Indian Real Estate generally, has risen exponentially in the affordable housing segment: consider analysis this from Arun Natarajan, founder of research firm Venture Intelligence:

Affordable housing has emerged as a significant theme among PE-RE (private equity real estate) investors, especially in the second half of 2017, with both domestic investors as well as international firms placing special focus on the segment.”

The majority of residential project launches in 2017 were, moreover, in the affordable and mid-range price segments, with the affordable segment alone accounting for 45% of the overall supply. And last year in India private equity firms made 67 investments with an aggregate value of $6.1Billion. Around 57% of this went into residential projects with affordable housing grabbing the lion’s share.

Modulex Modular Buildings has a unique part to play in this cycle of explosive growth within the Indian Real Estate sector: founded and based in the United Kingdom, the company is setting up a global franchise designed to develop the use of proven British steel modular technology so as to construct buildings quickly, where they are needed most, in emerging and growth markets and in India in particular. Red Ribbon Asset Management is proud to have founded and to be part of the Modulex Project.

 

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Indian Real Estate ten years on: The success story continues…

August 16, 2017

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Nostalgia isn’t what it used to be.

Red Ribbon Asset Management adopted cutting edge Impact Investment Strategies more a decade ago at a time when the Indian Real Estate Sector was widely perceived to be basking in its “Golden Age”; and its primary stimulus then was a staggering Rs 150 Billion investment from Dubai. If only things could be so good again…

Well, in fact they are; and they aren’t just as good, they’re better.

In the first six months of 2017 a record Rs 160 Billion poured into the subcontinent’s real estate markets from Dubai: easily eclipsing the 2007 pre-crash figure, even after it is adjusted for inflation and currency fluctuations in the intervening ten years. Because the fact is that things have never been so good in real property investment: right here, right now. Nostalgia isn’t all that it used to be.

Because India’s Real Estate Sector is on a resurgent high at the moment, helped in substantial part by the market friendly policies of Prime Minister Modi’s Government which have made real estate an especially attractive investment. In particular through the introduction earlier this year of The Real Estate (Regulation and Amendment) Act, widely known RERA, as well as last month’s innovative Goods and Service Tax which is widely expected to give a decisive further kick to real estate’s accelerating trajectory.

Anuj Puri, Chairman of the newly launched Anarock Property Consultants had this to say on the subject: “It is worth remembering that with the opening up of FDI (Foreign Direct Investment) in 2006 and institutional investments pouring into the sector over the last 10 years, we have already seen an increased level of transparency. That said, it was evident that more regulation was required and RERA will bring unprecedented levels of discipline and transparency into the sector. The Indian government is committed to bringing in the necessary changes that will help home buyers, investors, the various other industry stakeholders and the sector at large.”

With effect from last week, RERA, developers will be required to provide a five year structural warranty for all new builds. It is the first time that such an ironclad condition has been required from developers where,  earlier, the rule of thumb was that a property buyer was lucky to get any sort of long-term guarantee over a building’s structural soundness. How times have changed.

The innovative Real Estate Investment Trust, Demonetisation with its attendant increased levels of transparency and India’s ongoing focus on Affordable Housing have all added to this trend, helping to create a more mature, consolidated and efficient property market on the subcontinent.

So we shouldn’t expect the flow of funds out of Dubai and elsewhere to be slowing down anytime soon.

Red Ribbon Asset Management has placed Indian Real Estate markets at the heart of its investment strategies since that Golden Age back in 2007. And it continues to do so: it continues to look for cutting edge opportunities in India’s burgeoning real estate market, delivering above market rate returns for its investors and at the same time adhering to Mainstream Impact Investment Strategies.

Given India is the fastest growing Growth Market on the Planet at the moment that is a trend, which is increasingly difficult to ignore.

Read about the Real Estate (Regulation and Amendment) Act here

Read about Indian REIT Legislation and comment.

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How is the Indian government going to promote an environment for the growth and functioning of affordable housing?

February 20, 2017

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It was Adam Smith who pointed out that “people of the same trade rarely meet together, even for merriment or diversion, but the conversation ends in a conspiracy against the public or in some contrivance to raise prices”; and in his acidic way, Smith was drawing attention to a fundamental problem with the competitive market model: free markets can be the very opposite of competitive markets in practice, and some markets can only function effectively with state intervention.

The residential property market in India is a case in point.

India has one of the fastest growing populations in the World and the United Nations reported last year that the subcontinent would overtake China as the World’s most populous country by 2022 (less than five years off lest we forget); the population is predicted to reach 1.7 Billion by 2050. This explosive growth in population has been accompanied also by rapidly increased urbanization, with a profound demographic shift from country to town swelling already overcrowded conurbations such as Mumbai and creating an acute shortage of affordable, social housing. Something obviously had to be done.

Which was why the Housing for All Project was launched by Prime Minister Modi in June 2015 and it was on any basis a Project with vaulting ambitions, setting itself the target of constructing no less than 20 Million units of new housing stock by 2022 (the date when India is expected to become the world’s most populous country). The creation of the Project and the sheer scale of its ambition sent a clear signal that the Government was not prepared to leave the issue to the private sector to deal with on its own.

So far so good, except that the Project had more or less hit the buffers less than a year after its launch. By mid 2016 it had delivered only 1,623 new units of affordable housing. It would have been a wild understatement to say there was a long way to go and in less enlightened times the Project would have been virtually dead in the water; especially given the continuing year on year exponential growth in population which was exacerbating the shortage of housing stock and highlighting the Project’s continuing failure.

So it is good news that key provisions in this month’s Union Budget have demonstrated a reinvigorated commitment on the part of the Indian Government to meet its “Housing For All” targets through a newly energized partnership with the private sector.

In particular, the creation of affordable housing will now to be given Infrastructure Status meaning developers will in future find it a lot easier to secure access to institutional credit and the overall cost of borrowing on affordable housing projects will be reduced. The Budget Measures also take into account that social housing projects are currently taking longer to close; so the eligibility timeline has been increased from three to five years and the definition of “affordable housing”: has itself been revised available to a wider range of developers.

As part of the new Program, The National Housing Bank will also refinance 20,000 crore of existing housing loans, significantly reducing bottom line interest costs.

And the Budget didn’t overlook the ongoing issue which cash flow has been for developers either; with high levels of unsold housing stock falling to be taxed as part of their ongoing inventory, this was proving a real fetter on projects being completed. Under the new regime established by the Budget developers will get one year to pay tax on notional rental income accruing on completed but unsold residential inventory and there will also be a new reduced period of two years following which capital gains can be considered eligible for long term treatment.

With these new incentives in place, the Government expects 10 Million units of social housing to be built by 2019 which should put it firmly back on course to meet its “Housing For All” Target; and that has to be a good thing. The Private Sector hasn’t been slow to recognize this new found ambition either; this is what Anil Jindal, Chairman of the SRS Group had to say on the subject:

“This year’s Union Budget has ushered in positive advances for Real Estate. We are delighted to note the overall reforms initiated by the Government to promote an environment for the growth and functioning of affordable housing.”

All of which would suggest Private Sector Developers and Government Agencies alike have their eyes set firmly on the same target and are moving forward together. Adam Smith would have approved.

Red Ribbon CEO, Suchit Punnose said:

The rapid growth in India’s population and its projected status as the world’s most populous country by 2022, will undoubtedly bring benefits to the subcontinent’s economy; not least a sustainable and rising demand for infrastructure, goods and services, but there are social and environmental costs to the phenomenon as well. Not least the severe shortage in affordable housing stock, which the Government has been trying to grapple with for several years now with mostly disappointing results.

With that in mind, I was very pleased to learn of the incentives built into this month’s Union Budget for the affordable housing sector; in particular the new designation of affordable housing to “infrastructure status”; that, coupled with the various and very sensible tax breaks, which are also included in the Budget, should provide just the shot in the arm that the affordable housing sector needs. The wider property sector in India is already buoyant; it will be good to see the affordable segment catching up.  The opportunity is immense, but so too is the innovation challenge of achieving this sustainably.

 

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