February 20, 2017
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.