Investing in affordable housing can be rewarding

Keep return expectation limited to 10-11 per cent and ensure that the house you invest in can be rented easily

Keep return expectations limited to 10-11 per cent and ensure that the house you invest in can be rented easily. TINESH BHASIN writes

Despite the high unsold inventory in real estate, a few high net worth individuals (HNIs) are looking for investment opportunities in the affordable housing space. Their reasons: Costs are low, the developer has to stick to the project delivery timeline to avail of government sops, and there’s high demand for such homes.

A few clients of Abhijit Bhave, chief executive officer, Karvy Private Wealth, have even invested in this space. “Affordable housing is a lucrative investment avenue due to the high demand for such homes,” says Bhave. According to him, the major metros have witnessed rapid suburban growth in the last decade and are densely populated. Mumbai, for example, has a population of approximately nine million that lives in informal housing or slums, and they cover just 6-8 per cent of the city's land area. With government initiatives in affordable housing, this population will shift to affordable homes.

But most affordable housing projects are situated in far-flung areas and have basic infrastructure and connectivity issues. To keep costs low, developers don’t offer amenities in such projects. “Investors should look at houses close to metros, in upcoming areas where either infrastructure work has begun, or plans are sanctioned. They also need to maintain a long-term view and have reasonable return expectations,” says Gagan Randev, national director-capital markets and investment services, Colliers International India. The investment tenure needs to be at least seven years. Investors can expect an average annual return between 10 and 11 per cent.

Affordable is not low-cost: The affordability of homes varies with income levels. Affordable housing doesn’t need to be low-cost. The Ministry of Housing and Urban Poverty Alleviation defines affordable housing on the basis of size, price, affordability and income. An affordable house for a mid-income group, for example, would mean a unit measuring between 600 square feet (sq ft) and 1,200 sq ft, priced between ~1.2 million and ~5 million. For an investor, however, it’s best if he goes by the Centre’s definition based on which developers are given tax benefits. A developer gets sops if he constructs a house with a carpet area of up to 323 sq ft in the four metros and up to 646 sq ft in rest of the country. The sops can help developers to keep the prices low.

In the current environment, where unsold inventory is piling up, most sales are happening in affordable homes segment (See table). Real estate experts say that there’s money to be made at the upper-end of the affordable housing segment – ~2.5 million – ~5 million – where demand is highest at present. When the realty market recovers, this segment would see better price appreciation than others.

Metros offer better opportunities: Real estate experts say that the metros and their periphery offer opportunities to get better returns compared to tier-II cities. In Delhi National Capital Region, for example, an investor should scout for projects in areas such as Gurugram and Noida. Similarly, areas such as Thane and Navi Mumbai can offer better opportunities for affordable housing projects close to Mumbai, while one can look at Sonarpur and Barasat near Kolkata for such projects. As the outskirts expand, these areas can see better infrastructure development in the near future. “One way to select a project is to check if the house can be rented out easily. Also, ask yourself if you can stay in the area with your family in the future,” says Randev.

If the area lacks infrastructure, ensure that some work on infrastructure development has already started. It could be an extension of a metro line, a new railway station, a new highway, etc. Even if there are delays, such projects can help in price appreciation of the property. Also, opt for a builder with a track record. Many reputed developers have launched subsidiaries or other brands for affordable homes. Tata Housing has Tata Value Homes, Shapoorji Pallonji has Joyville, and Mahindra Lifespaces has launched projects under the brand name Happinest. These developers don't compromise on construction quality and many are offering amenities even in affordable housing segment.

Real estate experts also say that investors need to have a practical return expectation. “The key risk of investing in affordable housing is that prices are stable or moving up only marginally in most markets. If you are hoping for rapid appreciation every year, that may not come true,” says Gaurav Kumar, managing director and co-head, capital markets, CBRE India.

Other ways to benefit: If you don’t find a suitable project or don’t have the wherewithal to evaluate them, there are other alternatives you can look at to benefit from the high demand for affordable housing. “One way to access this opportunity would be to invest in the stocks of real estate companies that are getting into affordable housing. The other way would be to invest in a real estate fund, either equity or debt,” says Anshu Kapoor, head, Edelweiss Private Wealth Management. A third way would be to invest in companies associated with the housing sector, such as steel producers and those that manufacture housing materials, or housing finance companies that specialise in lending to the affordable housing segment.