URBAN INFRASTRUCTURE
Madhusudhan Menon, Chairman, Micro Housing Finance Corporation Ltd, looks at the current low-cost urban
housing scenario in India from the perspective of town planners, policymakers, developers and financiers, and
says, "A coordinated and well thought-out plan needs to be put into place, if we are serious about getting close to
achieving the objective of ensuring a decent living environment for our people."
India's urban population of
over 300 million has grown
five times over the last 50
years and is expected to
reach 50 per cent of the total population
within the next 25 years.
Over 30 per cent of the total
population is now urban and
uses less than 2 per cent of the
total land available.
The overall shortfall in urban
housing has been conservatively
estimated at over 25 million
homes that need to be built over
the next three to five years.
The total investment required
just for building these homes is
also estimated conservatively at
over
5 trillion.
Close to 90 per cent of the
demand for these urban homes
is from households with annual
incomes less than
300,000 that
too mostly (90 per cent) being
from the informal sector. Almost
all of them currently live in
cramped conditions in urban
slums or worse, paying a higher
per square foot rental than the
more prosperous segments of
the urban population. They also
pay for water and sanitation
facilities on a pay per use kind of
model, making the cost of living
even in these pathetic conditions
quite expensive.
The above numbers paint the
grim picture of the deteriorating
urban situation and the huge
challenges facing town planners,
policymakers, developer's financial
institutions and other stakeholders.
A coordinated and well
thought-out plan needs to be put
into place, if we are serious about
getting close to achieving the
objective of ensuring a decent
living environment for our people.
Increasing urbanisation
driven by reducing employment
opportunities in rural India is
bound to put further pressure on
urban housing and infrastructure,
and it is imperative that the
plan has to look at least 5 to 10
years forward before making
investments today.
We will look at the situation
from the town planners, policymakers,
developers and financing
perspective.
Town planners
We need to think of cities of the
future, rather than the patchwork
solutions on the existing
cities. As the economy shifts
from agrarian to industrial to
service orientation, jobs will
tend to be more scattered and a
lot more of the employment
force will tend to work from
homes or in smaller groups. So
well-planned satellite cities with
good infrastructure and good
connectivity to markets will be
the need of the future. Appropriate
investments need to be made
in localised education and
healthcare so travel from these
cities is minimised.
Lack of availability of land
banks and the high land and
transaction costs in the existing
cities are already so prohibitive
that it is almost impossible to
create affordable housing.
Appropriate land banks need to
be identified for future development
of integrated townships
where large-scale housing
developments can take place.
Supporting infrastructure for
transportation, communication,
sanitation, education, healthcare
and work opportunities
need to be part of the planning
input that town planners need to
put into place.
Government
For the central, state and local
governments the challenges are
multiple and immense. Multiple
regulatory clearances that are
required for large developments
delay projects and drive costs
upwards. Governments also
have a responsibility to ensure
that investments are facilitated
into the lower cost segments.
Almost all the new housing currently
being built by the private
sector is targeted towards the
upper middle class and highincome
groups and the government
has to incentivise creation
of housing stock for lower income
groups by waiver of stamp duties
for stock exclusively created for
lower income groups. The revenue
authorities need to already
consider waiver of taxes that are
inbuilt into the costs of inputs like
cement and steel. It has been
estimated that approximately 30
per cent of the input costs that go
into construction are taxes in various
forms, which are non-VATable
for the end buyer.
The government needs to view
this initiative as a social imperative
and be prepared to make
some immediate revenue sacrifices.
These revenue sacrifices
can be recouped at a later stage
when these vibrant communities
start creating new employment
opportunities, and start
spending on consumables and
consumer durables.
Developers
For the developers low-cost
housing represents a huge market,
immune to price fluctuations
and a great hedge to their existing
portfolios. However, they
need to make a major shift in the
way they currently operate. They
need to view this segment more
as a commodity type business
where cost and speed of construction
needs to be minimised,
stock created in large quantities
to achieve economies of scale,
and sold quickly to move on to
new projects. The good old attitude
of profiting from price
increases caused by delays will
just not do for this segment.
So an assembly line approach
to building, adoption of better
and cheaper construction materials
and technologies will help
in reducing costs and freeing up
capital for new projects. The
developers who build quality at
a reasonable cost will in the long
run create a brand and be able to
build a long-term business
model in a market that has huge
potential and is immune largely
to economic cycles, due to the
huge pent-up demand.
Financing
One of the major hurdles to the
development of low-cost housing
on a large scale has been thelack of financing for the end buyer.
It is a fact very few homes are
bought without mortgage financing,
regardless of the income levels.
The developers build for the
higher income group, because
only they have access to mortgage
financing. It is also a fact that the
income levels in urban India have
gone up considerably over the last
20 years. These segments live in
abysmal conditions, paying high
rents (estimated over
10 per sq. ft
per month), and has poor yet
expensive access to basic amenities
like water, power and sanitation.
The lack of access to financing
had inhibited this segment
from acquiring decent housing.
We hence need to create housing
finance companies with an
exclusive focus on the lower
income groups, who understand
the challenges of customer identification,
aggregation, credit verification,
and mortgage delivery and
servicing at a low cost. These
housing finance companies in
turn need to build partnerships
with micro finance institutions
which have good access to customers
from this segment, with
technology and mobile operators
to reduce delivery and communication
costs and with capital
providers to reduce overall mortgage
costs to the end customer.
Innovative approaches to
analysing and understanding
credit risks will facilitate scaling
up and in reducing transaction
costs. The fact that the underlying
asset backing this financing
is in short supply, should be of
comfort to those providing the
financing, and also ensure that
the borrower has a commitment
to service the mortgage.
At the macro level, the government
and the regulators like RBI
and NHB need to work towards
ensuring adequate capital flow to
this initiative. Given the massive
investment requirements, the current
curbs on free flow of foreign
capital needs to loosen, so that
developers and housing finance
companies focused on the lowcost
segment have access to this
source. They also need to build a
deep and liquid long-term debt
market, so that investors and users
have the ability to match tenor and
return expectations.
Finally, the creation of a well
capitalised mortgage credit insurance
company along the lines
prevalent in most advanced
economies will enable the proper
pricing of risk and in itself ensure
continuous flow of resources to
this segment.
To conclude, the low-income
housing sector has many challenges,
but is a huge business
opportunity for those who understand
it and are willing to wait out
the evolution of the eco system.
Proper facilitation from the government
and new approaches
from town planners, developers
and housing finance companies
can create a unique business
opportunity while at the same time
create a huge social change.