Only 10-15 lakh households in India can afford an apartment worth Rs 1 core: Shashank Jain, executive director, PwC

An version of this Q&A first appeared in DNA Money edition on Monday, January 06, 2014.

Shashank Jain, executive director, PwC India in conversation with Ashish K Tiwari speaks of the perils dogging the Indian residential realty sector and why the market is the way it is. Edited excerpts..

 

Unaffordable housing is said to be the key reason for lack of demand and oversupply scenario in key Indian metros. What is your take on it?

There are larger issues involved in terms of resolving this – not only with the developers but with the entire eco-system. Building affordable houses starts with two things, land and infrastructure and both go hand in hand. Land prices will always be high in places where infrastructure is already developed leading to significantly high starting input cost for the developer. So land cost in cities like Mumbai and National Capital Region (Delhi and Gurgaon) could form over 50% of the total project cost. And where the infrastructure is not developed, there are very few takers for the residential projects thus raising questions on their viability. So it's like a chicken and egg situation.

Unfortunately we haven't had a situation where both central and state governments have taken this pro-actively and have focussed on building infrastructure in a greenfield way – infrastructure has always played a catch-up role with urbanisation and development and not the other way round.

Residential market would pick up if you have a commercial catchment area in the vicinity. People would prefer buying into a residential project if their work place is close by as well. While a developer may build affordable housing, if the project is far away from the main city and if people have to travel over 2 hours one way to get to their place of work, the development will be a non-starter. So developing of commercial catchments is crucial for micro markets to pick up the way one would want it to happen.

A holistic approach with infrastructure, commercial, corporate and residential units around it is thus essential when developing cities and micro markets. All of it has to happen simultaneously.

But residential prices are unaffordable even in the extended suburbs of cities where there is very little or absolutely no infrastructure development.

I'd say that has also got to do with the availability / scarcity of resources (primarily land) and the situation is more severe in the Mumbai Metropolitan Region (MMR) because of its unique position / geographical layout.. However, if you look at the National Capital Region (NCR), it has expanded on all sides and offers housing across all price points. Similar is the case with Chennai or Bangalore markets which can expand horizontally. While it may not be completely affordable, one can possibly look at owning an apartment after stretching (finances) a bit.

Unfortunately, in India we are in a situation where if you look at from a developer's perspective, the input cost is so high that it makes the starting point unviable/unaffordable for the realtor as well. For a developer land is inventory and an essential resource for a long-term play of say 10-15 years or more. This means land prices have already seen significant appreciation at places where a common man would actually think of buying / residing. That's because the developer is thinking five to seven years ahead and focuses on acquiring land that may not be uninhabitable at present. So acquisition of land and development always plays a catch-up game and land prices are hence always ahead of the curve that way thus raising a big question on the affordability factor.

Also, income levels of potential home buyers haven't kept pace with the extent of increase in realty rates in the last 3-5 years.

That's correct. At max, salary levels on an average would have gone up marginally when compared to  overall inflationary increase. Leaving aside the exceptional cases, that's generally the kind of increments people would have got in the recent past. However, if you look at real inflation at the consumer level, it's far higher. So from a cash available to sustain I'd say it's a negative growth situation.

Now consider that scenario vis-a-vis developer's input cost for building a house, that's increasing year-on-year too. This is clearly evident from the fact that the primary market, which is is the key driver for affordability – where one can get into buying a house with lower capital requirement – is seeing an increase to the tune of 10-20% every year. Given the overall economic uncertainties of the last few years, salary levels certainly haven't kept pace with it and that definitely is a key challenge.

According to Apnapaisa.com estimates, a monthly income of over Rs 1.5 lakh is required to be able to purchase (through a home loan) a residential apartment worth Rs 1 crore. How many people in the working class would really qualify?

The National Council of Applied Economic Research (NCAER) and Centre for Macro Consumer Research do come up with such data. The last I recollect, there is a a bracket of households earning Rs 12.5 lakh and above and that number is just 1% of the total households. A quick math would reveal that if we are about 120 crore people and taking an average household size of five, then we are talking about 24-25 crore households in the country.

The reason I'm focussing on households is because buying a residential apartment is a household decision and not an individual decision. If 1% out of those many households are earning more than Rs 12.5 lakh annually we get a figure of 25 lakh households spread over the country. If we increase the Rs 12.5 lakh limit to say Rs 15-20 lakh I think it could be even half. So we are talking about only 10-15 lakh households who possibly be earning that kind of a money to afford an apartment worth Rs 1 core.

This profile of households would majorly be in the top four or five metros of the country that again brings back to your question about affordability. When people who can afford are concentrated in certain geographies, prices in such markets would shoot up. Which sort of makes it a vicious circle again, because wherever developers are building affordable housing people living there do not have the means to buy into such projects.

Another concern for home buyers is of the uncertainty in terms of delays / deliveries of housing projects be it in the city, suburbs or extended suburbs. It only adds to the dilemma (to buy or not to) and related sufferings.

Real estate is one of the few sectors wherein delays in a project execution actually gives more returns from a buyer's perspective. At a macro level, by making a booking and not paying for that owing to the project delay, I actually get an appreciation on the investment. That anomaly needs to get corrected at a macro level.

That anomaly could be true for the investor community. The end-user however is at the receiving end incurring rental and EMI expenses at the same time while fighting inflation...

I agree, the end-users are significantly impacted as a result of project delays. Unfortunately we are in a situation that in any project which gets launched, I'd think majority of the buyers are not end-users. It's a vicious circle. The investors are indifferent to any delays in the project as it helps them get better appreciation.

In fact, the registration numbers that get released every quarter, I'm told a large proportion of it is secondary sales.

The other related parameter in my opinion, is that in any micro market, if the secondary rates are Rs 1,000 to Rs 1,500 per square foot lower than what the developer is offering, that's a clear sign of an overheated market. Why would any project that's at an advanced stage of construction be sold at a lower rate as compared to a fresh launch? This is a clear indication that there aren't many takers in the market for projects that are significantly constructed and that clearly is an investor driven market.

But investors continue to drive the residential realty market thus giving the developer that much required initial cash flow.

There are two types of investors, one is the business community with element of unaccounted surplus being parked in the real estate sector. The government is trying to control it by imposing tax deduction at source (TDS) of 1% for an amount of Rs 50 lakh and more. Secondly, a significant chunk of investment is made by white collar executives especially in the metro micro markets. by This class of investors is putting their surplus income in second or third home and they don't have exit pressure. They have a steady stream of monthly income that helps support second or third home thus giving them a significantly higher holding power. That again brings back to the question that prices will not come down significantly.