On liquidity front banks are ‘already reluctant’ to fund realty projects and private equity funding is costly
Mumbai : The government’s vision of “housing for all by 2022” may turn out to be an uphill task with developers keeping off low-cost housing projects citing regulatory hurdles, high land cost and low returns making such projects “unaffordable”. At present, there is a shortage of 187.80 lakh dwelling units in urban areas, but this is not attracting developers to take up low-cost units as the sector is facing many challenges on the land acquisition front, soaring land and material cost and liquidity issues, say experts.
“The cost of project has significantly increased due to the delays caused which makes it unaffordable. Besides, increasing cost of land makes such projects economically less viable,” PwC associate director Bhairav Dalal told PTI. According to official data, 2,20,741 houses have been built in urban areas during the past three years under different programmes like the Jawaharlal Nehru Urban Renewal Mission (JNNURM), the Rajiv Awas Yojana (RAY) and affordable housing in partnership. “Developing a low-cost housing project in the current market conditions is challenging given the number of approvals needed before starting a project which increases the overall cost. Margins are very less, maximum 10 per cent, in this segment, but the costs are high which makes it unaffordable,” Kolte-Patil Developers chief executive Sujay Kalele told PTI. On the liquidity front, he said, banks are already reluctant to fund realty projects and private equity funding is costly.
“Banks lend at around 18 per cent while PEs expect returns of up to 23 per cent. Thus in a project which is costlier than its returns, financing them becomes a major challenge,” Kalele added.
To attract foreign investors, the government has reduced built-up area threshold from 50,000 sqm to 20,000 sqm and halved the minimum foreign direct investment limit to USD 5 million in the Budget. But only a few prominent real estate developers have entered the segment, including HDIL, Tata Housing, Purvankara, Value Budget Housing Corporation, Shapoorji Pallonji and Mahindra Lifespaces, among others.
Voicing similar concerns, Puranik Developers managing director Shailesh Puranik said, “If you have to develop a low cost housing project and yet expect good returns, then you will have to build large volumes. If I expect to gain similar returns from what I will get from middle or high-income projects, I will have to create large volumes.”
While the mid and high-income apartment may fetch around Rs 7,000-10,000 per sqft, a low-cost house will give around Rs 3,000 per sqft. “Be it a low-cost project or mid or high-income, the cost incurred in buying land and construction is same, but the returns are very low,” he added. However, regulatory reforms like single window clearances and specific tax holidays will provide some incentive to developers as their returns would be better, Dalal added.
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