Why infrastructure status will help the realty sector
Move likely to help the sector attract funds from insurance companies and qualify affordable housing projects for raising funds through tax-free infrastructure bonds
The Central government aims to provide housing to all its citizens by the year 2022. As per an estimate, the vision entails development of about 11 crore housing units, including the current shortage of about 6 crore units
The housing need is almost equally distributed in urban and rural areas in the range of 5 to 6 crore units, and primarily consists of affordable houses. It is concentrated in nine states. Estimates reveal that 70% of the housing needs until 2022 would be concentrated in just nine states. These states are Uttar Pradesh, Bihar, Maharashtra, West Bengal, Madhya Pradesh, Andhra Pradesh ( including Telangana), Rajasthan, Tamil Nadu, and Karnataka.
Urban affordable housing requires urgent attention. As per estimates, development of such large quantity of houses may require investments of over US$2 trillion. This translates to about US$ 250 to 260 billion annually, more than double the annual investments witnessed in the financial year 2014. About 85 to 90% of the total investments would be required for developing urban housing, where development costs are high due to factors such as land prices, construction cost, fees, and taxes, according to a NAREDCO-KPMG in India study, Decoding housing for all by 2022 - India’s commitment to inclusive, sustainable, and affordable development.
Wi t h i n u r b a n h o u s i n g , affordable housing (houses for EWS/LIG households) require attention on priority basis, as it alone would require about half of the total investments and 70% of urban housing needs envisaged. These investments need to be complemented with additional investments of about US$1.5 trillion in urban infrastructure and commercial real estate. Thus, a total investment of over US$3.5 trillion may be required for urban housing and supporting infrastructure.
Though, housing deficit is much wider in rural areas compared to urban areas, it requires only a small portion of total investments envisaged till 2022, which can be meted out without much difficulty. The Central government with participation from state governments, drafting a plan of delivering three crore houses in rural areas with an investment of ₹ 3.45 lakh crore (US$58 billion) by 2022 is a good start.
Strengthening private sector participation in urban affordable housing could help achieve the Housing for All by 2022 vision. Central and several state governments in the past have undertaken steps to mitigate the urban housing deficit, largely in partnership with the private sector. These efforts have yielded notable results. While the efforts of governments (both Central and state) taken in the past are commendable, they need to be accelerated to eliminate housing deficit in the country.
With the current set of housing development policies in place and assuming an annual growth in investments by about 5% to 6% in the housing sector (as witnessed since financial year 2008), the required investments may fall short by about US$500 to 600 billion. This gap in funding would l ikely be restricted due to several structural issues in the sector such as high gestation period of housing projects, limited and expensive liquidity, spiralling land and construction cost, high fees and taxes, unfavourable development norms, and affordability vis-àvis housing prices for EWS/LIG households.
Mobilisation of such huge resources (funding, construction capacity, labour, technology, etc.) for mass scale affordable housing development by the Central and state governments may be difficult, without participation of the private sector.
The private sector, which is often better in terms of managing construction risks and project delivery, should be encouraged by the Central and state governments, by addressing several structural issues.
Structural issues restrict participation, investments, and development of urban affordable housing. Since the beginning of the 21st century, a slew of regulatory reforms such as allowing foreign direct investments, improving access to credit by households, providing tax incentives on housing loans, developing special economic zones and thrust on infrastructure development, coupled with high economic growth, have propelled private sector participation in urban housing development. However, it has largely resulted in the development of middle income group (MIG) and high income group (HIG) housing, leading to significant shortage of EWS/LIG or affordable houses.
As per the report of the Technical Group on Urban Housing Shortage, EWS/LIG houses constitute more than 95% of the housing shortage in 2012. The development of urban affordable houses has been limited due to several struc- tural issues making it unfeasible business proposition for the private sector.
Agenda for action based on six themes needs to be introduced. These include encouraging private sector participation in urban affordable housing development. This could require a coordinated effort from Central and state governments.
A key role of the Central government in the Housing for All by 2022 vision would be that of a facilitator by creating an enabling environment through: Introducing statutory and regulatory reforms in land acquisition, and a real estate regulator, and review archaic regulations governing the real estate sector Streamlining clearances and approval procedures required from Central government agencies such as the ministry of environment and forest, and the ministry of civil aviation Channelising higher and longterm investments in the sector by providing necessary tax and non-tax incentives The execution responsibility would lie with states as, according to the Indian constitution, housing and urban development is a state responsibility. States should consider decentralising decision-making by empowering urban local bodies and streamlining the approval process by introducing a single-window clearance mechanism.
Both the Centre and the states can take measures to encourage private sector participation to expedite affordable housing development. These could include the following:
Strategic initiative for further impetus
Grant infrastructure status to the affordable housing sector.Housing development involves undertaking large scale urban infrastructure development projects. It involves purchasing of land and developing it for the purpose of construction of houses, multistorey buildings, and creation of physical and social infrastructure. Hence, housing development has dramatic similarities to the infrastructure sector.
Granting infrastructure status to the housing sector, especially affordable housing, could assist in opening certain additional funding avenues in addition to direct tax benefits available to the infrastructure sector, according to a NAREDCO-KPMG in India study, Decoding housing for all by 2022. This move may help the sector attract funds from insurance companies, who are mandated to invest 15% of their funds in social and infrastructure sectors (as per the Insurance Regulatory and Development Authority regulations).
It may consider qualifying affordable housing projects to raise funds through tax free infrastructure bonds.
Yet another step could be to form a nodal agency for coordinating efforts of various stakeholders.The Central government could explore forming a nodal agency under the ministry of housing and urban poverty alleviation to facilitate fast track development of affordable housing projects.
This nodal agency could be a coordinating agency amongst the private sector, consumers, lending institutions, investors, various housing regulatory agencies and infrastructure sector ministries, and state governments and ULBs. This special nodal agency could act as a facilitator in streamlining approval procedures for housing, formulating PPP policy, and coordinating the efforts of different ministries for large-scale housing projects.
It could also assist in directing funds towards the affordable housing sector by coordinating the effort tof the National Housing Bank (NHB), Housing a n d U r b a n D e ve l o p m e n t Corporation (HUDCO), banking institutions, housing finance companies, Foreign Direct Investments (FDI) and External Commercial Borrowings (ECB). It could be further responsible for identifying the available land assets with Central and state governments, ULBs and public sector enterprises, which are suitable for developing affordable housing.
Make strategic investments
Promote the PPP framework effectively to address major issues. PPP projects can play an important role in bridging the gap between the housing need and supply as they can be instrumental in attracting private capital for financially viable af f ordable housing projects. The PPP framework can be effectively used to address some issues in housing development such as land availability, approval delays, funding, and affordability.
Advantages of PPP model in affordable housing are: Land acquisition and consolidation. As per estimates, urban housing need would require about 1.7 to 2.0 lakh hectare of land to meet the housing need till 2022. Expedited and easier land acquisition, made possible by the public sector, could enable reduction in project costs.
Regulatory approvals: PPP mechanism can help ensure timely clearances of regulatory approvals.
Improved financing. A joint pool of private and public funds may be more effective and efficient in f inancing housing projects. Further, a PPP project with government guarantee may help secure lending from institutional lenders at lower cost.
Improved affordability. With some relief on stamp duty and development fees, and tie- up with banking i nstitutions, the affordability of houses by economically weaker section/ lower income group sections could be improved.