For even a small project to go on smooth lines and avoid the time over-run it is a must to have well-structured funding arrangement that takes care of required cash flow at various stages of implementation. Here we are talking about the Housing for All, within next 5 years! Government has set a target of building 10 million houses PMAY-Grameen, at a cost of Rs 81,975 crores in the first phase till 2018-19.
In the Union Budget, PMAY-Gramin allocation has been increased from Rs. 15,000/- crores in 2016-17 to Rs. 23,000/- crores in 2017-18. However, this alone cannot be sufficient for HFA mission. All the available options for funding the housing projects especially for EWS & LIG sections, need to be stretched to limits.
It is notable that more than 70% of the real estate investments in India, owe to household savings, rest 30% account for all other sources viz., government spending, institutional finance, private equity etc. The HFA policy has tried adequately to further incentivize the individual borrowers to avail credit linked subsidy from Banks. However, the greater concern is how to propel the capital inflow from other sources.
As per the estimates, nearly 70% of the housing requirements will be from EWS & LIG sections alone, which are by their very nature less profitable segment for the private and institutional investors. To incentivize, the government has extended the tax deduction scheme for affordable housing projects till 2021.
The infrastructure status for affordable housing is certainly changing the scenario in significant way. Loan tenure for the CLSS under PMAY has been increased from 15 years to 20 years. Holding period of property has been reduced to two years to qualify for long term capital asset. Also, the notional rental will be taken as nil for one year after date of obtaining completion certificate. All these measures are jointly creating the incentive mechanism that will attract investors and financers with renewed interest.
The government has liberalizes the FDI regime for the low-cost housing sector by bringing down minimum investment to USD 10 Mn and removing three-year lock-in period for exit. Considerable, the global capital flow into Indian real estate in 2016 stood at USD 5.7 bn (as per the Word Investment Report by UN Conference for Trade & Development).
Builders face the reluctance of formal banking system to extend credit. They have to turn towards informal funding sources, which are expensive and have bearing on the final cost of delivery. As per the norms, Insurance funds and pension funds are required to invest certain portion of their money in infrastructure sector. Due to government’s favorable policies for affordable housing, these funds can route to the sector and provided much needed long-term capital. . In future, we may see active participation of micro-finance institutions also in bridging the gap.
Housing projects need massive initial investments for land acquisition. It can go anywhere from 20 to 40 percent of overall project cost, even higher in cities like Delhi NCR and Mumbai. Still, there is no formal lending source available for land acquisition. If in future, the RBI allows the banks and housing finance companies in land purchase, this can ease the situation significantly.
The REITs are being looked upon with great excitement. As per JLL India estimates, total REIT listing could be worth Rs 1.25 trillion. If properly channelized, it can take way a significant burden off the financing requirement.
To bridge the gap between the overall fund requirement and government outlay on the mission, more favorable condition for the private investors, active role of banks & hosing finance companies and, ease for the PE players & FIIs/FDIs need to be ensured. The way policies are being amended favorably, the financial dimension of HFA mission may not be cause of too much worry.