Our housing crisis - III

India: Demographic trends suggest that India is on the verge of large scale urbanisation. With more than one hundred million being added to it, India's urban population is expected to reach 810 million by 2050. Housing will play a central role in this evolving drama. However, several structural issues such as high gestation period of housing projects, limited and expensive capital, spiraling land and construction cost, high fees and taxes, unfavourable development norms and low affordability of Economically Weaker Section (EWS) and Lower Income Group (LIG) households are bottlenecks restricting desired growth in housing stock.
As per studies conducted by the Ministries of Rural Development and Housing and Urban Poverty Alleviation, it is estimated that almost a quarter of Indian households, approximately 50 million households, lack adequate housing facility. The current Narendra Modi Government has launched a massive campaign that promises to provide housing to all its citizens by the year 2022. This vision would require development of 110 million houses with an investment of over USD 2 trillion...USD 290 billion per annum starting now. Most of the housing developments will be for EWS/LIG households (in both rural and urban areas) whose income is less than INR200,000 per annum. Nearly half this investment will have to be in major urban centers that are now plagued with shanty towns. (Our economy being a tenth the size of India's, a comparative government initiative would entail building of 11million shelters costing PKR 8.25 trillion over the next 7 years with PKR 1.17 trillion, or a quarter of annual expenditures, being disbursed for this purpose each year!)
Since a bulk of housing activity is in the private sector, the Indian government needs to accelerate its efforts to broad-base and significantly augment public-private-partnership programs introduced in the past. In order to achieve this, several policies and regulations will need to be revamped to promote better co-ordination between housing stakeholders; powers will need to be delegated to urban local bodies; drastic reduction in project gestation times will have to be ensured; fees and taxes will need to be rationalized; and project costs and timelines will need to be clearly spelled out.
Status of Current Housing and what needs to be done:
-- The country is short some sixty million housing units
-- Annual investment activity in this sector is about USD110 to 120 billion
-- The real estate sector is growing at 6 percent per annum
-- Central and State governments contribute only USD5 to 6 billion per annum. This is barely one twentieth the sectoral investment noted above, and just one percent of annual expenditures of both Central and State Governments.
-- To achieve 2022 goals, India needs to more than double this sector's annual investment...a CAGR of 12-13% (unadjusted for inflation). Even by Chinese standards, that is a very tall order.
-- To eliminate slums, urban housing will account for about 85 to 90 percent of total investments of which 70 percent will have to be affordable EWS and LIG housing
-- These investments need to be complemented with additional ones of about USD 1.5 trillion as commercial and infrastructure real estate. Thus, a total investment may exceed USD3.5 trillion.
-- About 170,000 to 200,000 hectares of land is expected to be required to fulfil urban housing need by 2022.
But, if it is to succeed, the foregoing grandiose plan must address following debilitating shortcomings:
1. Absence of an effective policy framework for EWS and LIG housing, which is beset with rising land cost, spiraling construction costs, and inadequate availability and reach of concessionary or micro-finance measures
2. Long gestation period of six to eight years in most housing projects, confounded by approvals from multiple authorities spanning two to three years.
3. Inadequate long-term funding across project life cycles necessitating multiple rounds of refinancing for the same project, increasing the cost of capital. Further, since term finance is not offered by the banking sector for land acquisition, it entails needless tying up of large pools of equity capital.
4. Multiple fees and taxes across various stages of project development which inflates construction cost by 30 to 35 percent.
5. No focus on affordable urban housing constituting 70 percent of the projected total urban housing need.
Action agenda It is based on following major requisite initiatives, which operated in unison could convert the foregoing Modi government dream into reality.
1. Granting Infrastructure status to 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, multi-storied 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. This move may help the sector attract funds from insurance companies, who are mandated to invest 15 percent of their funds in social and infrastructure sectors (as per the Insurance Regulatory and Development Authority regulations). Qualifying affordable housing projects to raise funds through tax free infrastructure bonds will be critical.
2. Channeling long-term funding into urban housing: Annual growth in housing investments has slowed significantly in last couple of years. To attract higher investments, the government could consider increasing institutional lending to the sector, introduce long-term housing bonds to attract households and private savings, and strengthen domestic equity and debt markets.
Further, the government could consider allowing financing of land parcels by either foreign investors or through institutional lending. The government could consider increasing budgetary support to affordable housing. At present, both central and state governments combined investments are in the range of USD5 to 6 billion annually while the sector contribution is significantly high. The taxes on property and capital transaction alone amounted to USD 16 billion in FY14. Even if half of this is set aside each year for acquisition of urban land for affordable housing, it would create a sea change in cost and time to completion of related projects.
3. Decentralization and Single window operation: Delegation of power to local governments could help decentralize decision making enabling introduction of reforms at the local level. This could help expedite decision-making and reduce lengthy procedures of introducing reforms. However, despite 74th Amendment in the Constitution of India, directing states to delegate powers, several states have not taken the necessary steps. A push to decentralize decision-making is required from central government which can be done by either persuasion or offering incentives to willing states.
The current approval mechanism in many states is a complex process, as on an average a developer requires 30 to 40 different approvals from central; state; and local bodies. It takes two to three years to obtain necessary approvals which increases housing development cost by 20 to 30 percent. The delay is primarily due to factors such as duplicity due to overlapping regulatory jurisdiction of various authorities, lack of institutional clarity which is open to individual interpretation, involvement of multiple departments, weak allocation of responsibilities and accountability. Development of 'One-stop-shop' or 'single window clearance' system connecting regulatory authorities at the central, state, and local government level, supported by a robust technology platform, could help reduce the complexities and delay in approvals. This single window platform could be operated either by the state or municipality or local development authority.
4. Reviewing Building Development norms and restrictive laws: India's Floor Area Ratio/Floor Space Index (FAR/FSI) norms are much lower compared to international cities resulting in horizontal rather than vertical expansion of cities, and thus limiting the scarce urban land. Allowable density norms in India are inadequate for economic development of EWS/LIG houses. There is an urgent need to revisit these restrictive norms. Further, additional development norms such as internal roads and parking space could be relooked at, and if possible, relaxed for EWS/LIG housing.
Unavailability of land, especially in urban areas, is a grave issue affecting the development of housing. With the clearance of Land Acquisition and Resettlement & Rehabilitation Act, 2013 (LARR Act), the complexities in acquisition of land have further increased. It is estimated that the acquisition of land under the new method would not only increase land acquisition cost by two to four times (in urban and rural region respectively), but it would take at least three years to acquire land. Clearly, this is a retrograde legislation that needs to be scrapped.
5. Promoting rental housing& empowering EWS/LIG households: A mix of rental and ownership housing is required to address affordable housing needs effectively as is the current practice in other countries like Malaysia and Turkey that have tackled the same issue. Rental housing is important for addressing the needs of low-income residents in the context of a rapid rise in the urban population. However, rent control policies aimed at protecting tenants have had their consequences of deterring investments in rental housing in India, causing the share of rental stock to decline from 54 percent in 1961 to 27.5 percent in 2011 which drove EWS/LIG households into slums. Further, the Government housing programs promoted ownership housing and did not look at creating rental stock, a feasible first option for EWS/LIG households. In most developed OECD countries, public rental housing stock is often 30-40% of total housing stock. Private rental stock is another 20-25%.
EWS and LIG households desperately need subsidies, lower loan interest rates, and easy access to micro-financing. The current annual income level of EWS (INR 100,000) and LIG households (INR100,000-200,000) may not be sufficient to afford a house (EWS and LIG houses are generally in the range of INR500,000 to 700,000 and INR1.5 to 2.0 million respectively). The issue is further deepened due to low access to credit by these segments. According to professional survey estimates, an EWS household can barely afford a house costing under INR 400,000, while LIG households can afford a houses priced up to INR 800,000.
6. Rationalizing various fees and taxes: Central and state governments, and local bodies need to work together to incentivize affordable housing development to improve housing affordability. A key area of consideration in affordable housing could be through a set of concessions related to taxes and fees. It is estimated that taxes and fees account for about 30 to 35 percent of housing cost. Reducing this burden could enable developers to provide cheaper houses. Several charges such as external development charges, building plan approval fees, land conversion charges, stamp duty, value-added taxes, service tax, direct tax benefits, etc, should be reviewed and rationalized for affordable housing developments.
7. Promoting mass housing construction technologies: Improved construction technology and methodologies can help execute housing projects more efficiently and in lesser time. Construction techniques such as prefabricated and modular construction and innovative construction materials can further help execute projects in lesser time and with reduced resources. More impetus however, would have to be provided to promote the use of these initiatives. Some suggestions in this direction are:
-- Offer subsidies and waive off import duty on special construction equipment, technologies, and materials.
-- Provide incentives such as excise duty and value added tax waiver on pre-fabricated construction items.
-- Promote active R&D in this for the development and marketing of newer, more effective technologies, materials, etc Domestically the usage of such technology could help in fastening the delivery of housing stock and meeting the housing for all vision.
Though it is too early to speculate how India will fare in its grand design delineated above, one can get a small glimpse of what a rationally thought out program can deliver. One such live example is that of Rajasthan affordable housing public-private-partnership (PPP) model. The state was facing shortage of more than 110,000 housing units. The State Government undertook key Policy level changes by drafting an extensive PPP policy for different types of developmental activities such as Land owned by the government, Land owned by developer, Acquisition of land by the government, and Slum rehabilitation.
Key benefits extended included a doubling of permissible FAR/FSI limits and waiver of external development charges, building plan approval fees, and land conversion charges. Commercial use of up to 10 percent was allowed and setbacks and parking norms were relaxed. Fast track approval (within 30 days) was guaranteed. Token stamp duty replaced earlier heavy duty. And, most crucially, the State offered a Flat buy back to owners and developers at predetermined prices (INR750 per ft2 for EWS/LIG and INR 1,000 for MIG).
Result: The policy facilitated construction of about 235,000 houses in 77 cities across Rajasthan, of which 210,000 units were given possession by December 2013.
Key lessons of the survey:
I. Need of political will and empathic governance. Social housing is a primary responsibility of the Government. Expecting market forces to create this infrastructure is impractical and unrealistic. All across the developing world, urban slums are proof of this failure of governance. Private sector construction and real estate development has not, and cannot be expected to cater to the demands of Low Income Housing.
II. Slums cannot be cleared by administrative fiat. They fade automatically when their EWS/LIG residents are provided alternative affordable housing in the same location and not in urban peripheries.
III. Dearth of affordable term finance. When it comes to long term mortgage finance, commercial banking provides the requisite funding backbone in most developed economies with deep capital markets. In the developing world, however, asset-liability mismatch in the banking sector is common. Whereas mortgage finance demands tenors of 15-30 years, customer deposits have maturities of 0-3 years. Hence, offering fixed rate term financing to borrowers is infeasible. Countries that have ensured their Central Banks provide subsidised and fixed rate funding to lenders for the specific purpose of financing Low-Cost Housing have succeeded.
IV. Distinction between the housing needs of affluent and upper middle class groups on the one hand and those of EWS, LIG, and MIG segments on the other need to be clearly understood. While housing for the former can be safely left to the private sector (as is the case today), the latter's needs can only be successfully managed via low-cost high rise developments. At the very bottom, offering qualified EWS citizens decent shelters will literally be acts of charity. The best occupants can do is pay nominal monthly rentals towards maintenance of these properties. Similar housing for the LIG (and MLIG) can be managed as both rental and mortgage financed properties...but at subsidised rates. Lastly, the MIG segment can afford commercial rates of finance. Offering them mortgage financed housing can be used to cross-subsidise lower income groups.
V. Best results have been achieved by countries that have a dedicated and fully empowered organisation for provision of Low Income Housing. The paradigm for this is TOKI in Turkey. Not only does it routinely receive Free State Land and subsidised funding, it has budgetary support and a substantial stream of tax revenue (departure fee at airports), and service fees from providing housing to district and local governments.
VI. Bureaucratic licensing and restrictive building and zoning laws need to be amended. On the sub-continent, these are responsible for high land cost and lengthy time to completion of real estate projects.
VII. Modern building technologies and going vertical. Tunnel-formwork building, innovative material solutions such as light-weight foamed cement bricks, and pre-fabricated panels, etc can all lead to cost and time saving. Restricted height and spread out housing development is costly and wasteful. Building, especially for EWS and LIG segments must be vertical and multi-story as it reduces unit construction cost as well as overall cost of services.
VIII. Tackling trade mafia. Building trades in most developing economies are akin to mafias. This is especially true of the sub-continent. We have noted above that in the case of Pakistan, basic building materials cost 300-500% more. Given the will, government action can quickly address this by threatening import competition where prices are widely divergent from international norms and zero-rating import tariffs for all building materials used in EWS and LIG housing.
If the government firmly resolves to address all of the foregoing issues, there is no reason why an indigenous organisation (for instance HBFC) cannot be converted into the TOKI of Pakistan...a powerful force for provision of shelter for all, a national priority that has remained unaddressed for 68 years.
(Concluded) (The writer is Director at HBFCL)