How to select an Affordable Housing Project?

In my previous post on Affordable Housing – A Myth or Reality, I discussed the nitty gritty of Affordable Housing which is a new buzz word in the reality market. Today while going through property section of a newspaper, I observed that although a majority of the ongoing projects are positioned as Affordable Housing Projects, only a handful are indeed so in true sense. It does not cost anything for a builder to tag a project as Affordable Housing Project. Low cost housing is often referred to as Affordable Housing Project by small builders which we will discuss in detail in this post. As a buyer, you can easily make out whether the builder is serious about this concept or not. Seriousness reminds me of one of the very well-known real estate company Puravankara Projects Limited created a separate subsidiary “Provident Housing Limited” to focus on Affordable Housing.

As we know that one shoe doesn’t fit all, the same holds true for Affordable Housing. It requires a different kind of focus with dedicated teams to deliver the fundamentals of Affordable Housing Project. The 3 pillars of Affordable Housing are SPEED, QUALITY and VALUE FOR MONEY. I also browsed the websites of other real estate players in India but a dedicated focus on Affordable Housing is missing.

Now you must be wondering why there is so much buzz on Affordable Housing projects. Recently the PM of India launched an initiative to provide Housing for All by 2022. As per KPMG, there will be a shortage of 11 Cr housing units by 2022. Current shortage is of 6 Cr units. The key reasons for the increase in shortage from 6 Cr in 2014 to 11 Cr in 2022 are the rapid pace of urbanization and increasing mid-income segment in India. Approximately one third of this demand is expected in the Affordable Housing segment. In short, there is an existing shortage of 2 Cr units in the affordable housing segment which will increase to approx 3.66 Cr. As per census of 2011, 31.16% of India’s population lives in urban areas. By 2030, India’s 40% population is expected to reside in the urban areas. Percentage wise there is an increase of 9% from current level. In absolute terms, it will be huge as population of India will also increase. Because of the concentrated urbanization, 70% of this demand will be from 9 states in India. It will be interesting to see, how upcoming ’Smart Cities‘ will ease this load. With the growth of the economy and focus on ’Make in India‘, Indian mid-income group households will more than double to 113.8 Mn in next 10 years from existing approx 55 Mn. To summarize, Rapid urbanization and growing mid income group will create a huge demand for Affordable Housing Projects in future. I think this is the reason why Provident Housing Limited is focusing only on Premium Affordable Housing Projects to cater to the rising demand of this growing segment.

It’s an irony that despite a shortage of 6 Cr units, the Real Estate sector is bleeding. To create a win-win situation for both the buyer and the builder, the only way forward is Affordable Housing Projects. In this post, I will share how to select an Affordable Housing Project in the true sense from the host of projects launched recently. I am going to discuss 5 critical points, which a buyer should consider before finalizing Affordable Housing Project.

1) Reputation of a Builder

Builder’s reputation is very critical, especially when you are buying an Affordable Housing Project. Reason being, reputed builders will never compromise on the quality and trust factor. There are 3 sectors in which reputation pays by means of loyalty/word of mouth of the customer i.e. Medicine, Law and Real Estate. Current referral ratio in Service sector is 40%-50% whereas in the brick & mortar segment, referral ratio of 20% is considered to be excellent. Reputation cannot be built overnight; it has to be earned over a period of time. Also if a reputed developer enters the Affordable Housing segment the move will not risk its highly profitable premium segment. The developer’s reputation guarantees quality and trust.

2) Confusion between Low Cost and Affordable Housing

Let me clarify this – Affordable Housing Project does not mean Low Cost Project & vice versa. Many builders, in particular the smaller ones, mislead customers by positioning Low Cost Projects of Poor Construction quality as Affordable Housing Project. It’s like playing with a mind of a customer. In India, people do not like products or services tagged as cheap or low cost. The best example to substantiate my point is the failure of Tata Nano. Tata Nano was positioned as the Cheapest Car in India and this positioning backfired. Indians want value for money  and not cheap products. After this mistake, Tata Nano was never able to recover from the way the brand is perceived today. Contrary to this when Hyundai Santro was launched in India, it was positioned as an Affordable Car for the middle class. Today despite so many attempts from Hyundai to discontinue Santro, it is still the no 1 selling hatchback in India. Small time builders know that if they position their project as a Low Cost Project, then it will backfire. The best way to market these projects is to term them as Affordable Housing project.

To summarize, Low Cost Housing and Affordable Housing are completely different from each other. To differentiate between the two, Low cost housing is purely linked to the pricing. Whereas Affordable Housing is linked to income level, size of the housing unit and affordability. This is the reason, I mentioned at the beginning of this post that only a handful projects are truly affordable. As per KPMG, a housing unit between 600 to 1200 sq ft targeting the segment with income level between 3-10 lakhs per annum, wherein the EMI to monthly income ratio is up to 40%, can be termed as Affordable Housing for MIG segment.

Demarcation of low cost housing and affordable housing is an important step to separate Affordable Housing Project from the rest.

3) Construction Quality

Technology has evolved over a period of time. I remember, as a kid of our house was getting constructed. It was 4-5 months project. The entire structure was built brick by brick. The brick and mortar structure is labour intensive thus increasing the overall cost. Over a period of time, new construction technologies are used by builders without compromising on quality. These new technologies require huge CAPEX which a small time builder cannot afford. As a buyer, we can research on construction quality used by builders. Recently I read about Pre-Cast Construction Technology. The advantages of Pre-Cast Construction Technology are speed, quality and value for money. Co-incidentally these 3 are core essentials for affordable housing project.  Pre-Cast Construction Technology reduces construction cost by 15-20% thus the builder can pass this cost advantage/savings to buyer and projects are delivered way before time.  In fact quality of Pre-Cast Construction Technology is better than regular brick and mortar projects.

4) Basic Amenities

Basic amenities are an essential part of the Affordable Housing projects. Another way to cut down costs is to bring down the amenities or compromise on the scale of amenities. For example, a project for 500 families requires specific capacity of STP (Sewage Treatment Plant). Now to cut down cost, the builder may compromise on the capacity of STP and hence the buyer may suffer in future. A reputed builder will not compromise on the scale and scope of the basic amenities. Rather they will utilize economies of scale to reduce the cost. The definition of basic amenities varies from city to city. In Mumbai, due to scarcity of land, almost all projects are plain vanilla projects with basic amenities. In Bangalore a club house, children play area and gym are now considered as basic amenities. Depending on the city, you may check the basic amenities included in project keeping future requirement in mind.

5) Units sold on Home Loan

As mentioned, one of the basic criterion for Affordable Housing Project is affordability. As there is no standard definition of affordability, how does one check the affordability of the project? A buyer can simply check how many buyers have availed Home Loans while buying a property in Affordable Housing Project. It will give a fair idea whether project is truly affordable or not. In HIG segment, at least 80%-90% units are sold through mortgage. In Affordable Housing Project, out of 100 buyers at least 20 will buy as an investment. Another 20 can buy without home loans but will avail home loan to save income tax. Out of rest 60, if 50% buyers are buying without home loan then we can safely assume that project selected is truly an Affordable Housing Project. The income level of majority of buyers in this segment will be max 14 lakhs per annum. In short, if in any project 50% of the buyers are buying without availing Home Loan, then it can be safely labeled as an Affordable Housing Project.

We discussed 5 important points to consider before finalizing Affordable Housing Project. Till this point, we mainly addressed the concerns of an end user. What if, I am considering Affordable Housing Project just as an investment? What are the future prospects of Affordable Housing Project? In short, the next logical question is:

Should I invest in Affordable Housing Project

Answer is definitely YES! As we discussed, urbanization and the growing mid income group will generate demand either in Affordable Housing segment. Currently, the average appreciation in Affordable Housing Project is between 10%-15% (projects of reputed builders). The demand will increase in future and because of severe shortage, hence affordable housing is all set to generate maximum returns for investors. Besides the growing demand, incentives from the government for the Affordable Housing Projects will fuel further interests of both the developers and the buyers in this segment. As land is a scarce resource, the developers with 1st mover advantage will stand to gain, including investors who will invest during the initial phase of the Affordable Housing life-cycle.

I hope, after going through this post and my previous post on Affordable Housing I have answered almost all the queries raised by our readers related to Affordable Housing Project. You can share your views, comments, feedback and queries through following comments section. You may share this post with your friends and family members through social media icons.

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