Government is likely to announce another stimulus package early this week. It may follow with banks announcing rate cuts. The package is expected to be directed at employment-intensive sectors. This will certainly give some more relief to realty sector which has got a marginal boost following the first stimulus package announced last week.
With encouragement from the government, Indian public-sector banks have agreed to cut interest rates on home loans to about eight per cent for loans less than Rs20 lakh. Top bankers met with finance ministry officials mid-week and agreed to lower rates not only on home loans but also for loans to small and medium enterprises. Figures indicate that, as many as 80% of India’s home loan borrowers have taken less than Rs20 lakh as loan. Floating interest rates stand at 11% now.
With these economic stimulus packages, the time has come for the real estate industry to strengthen its base. However, most players feel that while the package was good, more measures are needed to restore the buoyancy in the sector.
A general response by any sector in the throes of a slowdown would be to cut prices in the short term, lower the prices to encourage demand and retain their market share. If they cannot cut their prices for any reason another strategy would be to identify the market segment which holds potential. For the real estate sector that is ‘affordable housing’.
The slow down experienced by the sector has compelled developers to redefine their product portfolio. But the activity on the ground is limited largely due to apprehensions of low profit margins. Realtors should realign their strategies across all segments, primarily the residential segment, which poses the greatest challenge.
Home buyers with a budget of Rs 30-40 lakh have deferred their plans to buy new houses due to concerns about the economic scenario. To regain customer attention and meet their requirements, developers should offer the right products at the right price and time.
The support measures announced by the government are a good initiative that would support demand growth in the housing sector, particularly in non-metros. Bringing under priority sector the lending to Housing Finance Institutions to support home loans of up to Rs 20 lakh would help the growth of affordable housing, encourage banks to increase lending to the housing sector and bring down interest rates.
Developers should appreciate the shortage and demand for housing in India, which will exist for at least the next 10 years, and deliver the products which meet the demand at a realistic price. In general, affordable housing is used to describe dwelling units deemed affordable to a group of people within a specified range. It includes value housing, which is the need of every middle class family, as well as low-income housing.
The Planning Commission has estimated that the urban housing shortage at 26.53 million units over the next four years up from 24.71 million in March 2007, with the economically weaker sections/lower income group accounting for about 99 per cent of the shortfall. With 26.8 per cent of the poor in the country living in urban areas, there is a need to focus on providing affordable housing in urban areas. The total estimated investment for meeting the housing requirement up to 2012 is estimated at Rs 3,613 crore. With rapid urbanisation, one of the biggest challenges will be to provide affordable housing to city dwellers.
As one expert feels, real estate in India is a game of interest quotient. Nothing else matters to the buyer. India has become very driven by credit in home loans, etc. Huge numbers of middle class people were waiting to take loans if the EMI fits into their monthly budget. So, the extent to which the interest rates are falling, 3 to 4% in the economy, that is all the real estate people want and even steel and cement are falling quite a bit. So, they don’t require anything else. Thus, we have to see how this interest rate reduction works out through the real estate cycle.
Though there are challenges ahead in getting into the affordable housing segment and one of them being high land cost which constitutes 25 to 35 per cent of the total project cost, thus reducing potential margins in the business and affecting the viability of affordable housing in existing residential projects. The government should address these issues through an all out effort to achieve the socio-economic obligation of providing housing.
The growth will also help the steel and cement sectors, generate skilled and unskilled employment and support small-scale industries.
Tax sops including reintroduction of income-tax benefit to developers under Section 80IB, cuts in duties and levies for the real estate sector reduction/ removal of multiplicity of taxes, stamp duties, VAT, service tax, and other duties and levies.
The government should provide special tax incentives for those interested in affordable housing. Building plan approvals should be made easier and simpler. For projects which have units with built up space of 1,250-1,500 sqft, the approval process should be made simpler. Affordable housing is still at an early stage in India. It holds great potential to redefine the contours of Indian real estate. Sustained returns over long term will be the major catalyst.