Developers reluctant about Modi’s “low-cost housing” proposal

Following the formation of the BJP led NDA coalition at the Center, the government had announced one of its flagship programs with regards to providing “housing for all by 2022”. In this regard, a meeting was convened in early July which was attended by representatives of the Urban Development ministry. The feasibility of executing the program through the Jawaharlal Nehru National Urban Renewal Mission (JNNURM) was discussed at length. However, even as the government was chalking out its course of action in this regard, developers have begun to shun taking up of low-cost housing projects. Developers felt that such projects would be non-lucrative to them due to high land costs, regulatory hurdles as well as low returns.

This cannot be considered as a unanimous decision taken by developers in general. However, if a considerable number of developers are averse to taking up low-cost housing projects, it is bound to have an adverse impact on the program envisaged by the government. This would leave the prestigious vision of the government to provide housing for all citizens by 2022 in jeopardy. While the government can consider local developers to construct low-cost houses in rural areas, their primary concern would be to find developers who would take up such projects in urban centers. This is also bound to have a demoralising impact on people in urban areas looking for affordable housing options.

Inefficacy of state governments

The burgeoning population and the increasing requirement for affordable housing in urban areas has put undue pressure on the government. It is finding it increasingly difficult to sort out the housing woes of people particularly belonging to financially weaker sections of society. The government had previously constructed many low-cost housing projects for economically weaker sections in urban centers when the land value in such areas were considerably low. However, many of such projects are facing dilapidation due to inferior quality of construction forcing the government to raze such structures down. Families who have been rendered homeless as a result are either rehabilitated in shacks located in government land on the outskirts of the city or are forced to stay in temporary tents on the roadside in the vicinity. In other instances, land sharks have usurped land allotted to weaker sections were construction of malls and major residential projects are being undertaken in connivance with government officials.

Challenges faced by developers

As per estimates, currently there is a deficit of about 187.80 lakh houses in urban areas. A majority of this is related to demand for low-cost housing from which developers are shying away from. The prime reasons why developers are uninterested in taking up low-cost housing projects is due to land acquisition issues, rising costs of land and construction materials as well as issues related to liquidity. As told by the  Chief Executive of Kolte-Patil Developers, Sujay Kalele to  PTI there are various factors that make low-cost housing projects non-lucrative. He felt that rising project costs can be attributed to the delays caused in obtaining various approvals as well as due to increase in construction costs. In case of low-cost projects, rise in costs severely effect the margins of developers, limiting it to about 10 per cent. With regards to liquidity, banks are reluctant to fund realty projects and even if they do fund, the interest rates charged are exorbitant at about 18 per cent. Private Equity funds are even costlier with interest rates of about 24 per cent.

The way forward

In such a scenario where the project cost exceeds the returns, it is quite normal for developers to shy away from them so that their interests are not jeopardised. Given the precarious situation that the government is faced with, it is imperative that low-cost developers are given some leeway in the form of reduction in land acquisition hassles, availing of government land at lower rates, subsidies in costs of construction materials, lesser and faster approvals as well as the availability of cheaper funds.