Keys To Unlock Homes
Owning a house in India was always an expensive affair. But nowadays, it has become even more dearer to own a home. And this is adversely impacting the ‘affordable housing’ segment. Apparently, buyers in this segment are increasingly putting off purchase decisions for a whole host of reasons, leading to languishing sales and developers curtailing supply.
Confirming this trend is the findings of a recent report by leading property consultants ANAROCK. The share of affordable housing in overall sales in H1 2023 fell to 20 per cent, down 11 percentage points compared to the corresponding period in 2022. Likewise, in the top-7 cities, this segment's share in the overall housing supply in H1 2023 plunged to 18 per cent, from 23 per cent in H1 2022.
The fact that affordable homebuyers have been paying almost 20 per cent more in their EMIs over the last two years has also not helped matters. The floating interest rates for home loans up to Rs 30 lakh have jumped from 6.7 per cent in mid-2021 to nearly 9.15 per cent today.
Prashant Thakur, Regional Director & Head – Research, ANAROCK Group, says, “Home loan borrowers who were paying an EMI of Rs 22,700 in July 2021 are now paying around Rs 27,300 today -- an increase of Rs 4,600 per month. This 20 per cent increase in the EMI has resulted in a jump of Rs 11 lakh in the overall interest component -- from around Rs 24.5 lakh interest payable in 2021 to around Rs 35.5 lakh today.”
The total interest payable over a 20-year tenure is now more than the principal amount, says Thakur. If a buyer seeks to buy a property worth over Rs 40 lakh, factoring in the LTV (loan to value) ratio, the total borrowed amount is Rs 30 lakh for a tenure of 20 years. In this scenario, the buyer would have paid an EMI of Rs 22,700 in 2021, when the interest rates stood at around 6.7 per cent.
“At this rate, the total repayment to the bank was around Rs 54.5 lakh, of which the interest component was around Rs 24.5 lakh -- less than the total principal amount,” says Thakur, adding, “Today, when home loan interest rates hover at around 9.15 per cent, this buyer's EMI is around Rs 27,300. The total repayment to the bank at this rate is now Rs 65.5 lakh, of which the interest component will be around Rs 35.5 lakh -- more than the total principal amount.”
Echoing the sentiments, Niranjan Hiranandani, Vice Chairman, NAREDCO says, “The market is experiencing a supply catch-up to meet the soaring demand for mid-priced and luxury housing, while the weakening demand for affordable housing represents a spoiler alert.”
Reviving Stalled Projects
Today, Rs 4.08 lakh crore of value is locked in more than 4.12 lakh stressed housing units. The numbers haven’t changed much over the past year. At the end of May 2022, 4.8 lakh homes worth Rs 4.48 lakh crore were stuck or significantly delayed across seven major cities. A majority of these projects are located in Delhi-NCR and Mumbai Metropolitan Region.
According to Sunil Mehta, Chief Executive, Indian Banks’ Association (IBA), if 75 per cent of these stressed units are recovered, about three lakh units will get added to the housing sector. "The resolution of these stressed units will assist the middle and lower middle class in getting houses for which they have already paid a substantial amount," said Mehta, before a committee set up under Amitabh Kant, former CEO of NITI Aayog, by the Ministry of Housing and Urban Affairs (MoHUA). This committee, charged with formulating comprehensive strategies to breathe life back into these stalled ventures, has submitted its report. The action now shifts to the various state governments and their respective housing authorities to implement the suggestions. Most of these stalled housing projects date back to more than a decade or more.
Problem & Solution
At the crux of the problem identified by the committee is the financial infeasibility of these projects, resulting in escalating costs and persistent delays. The committee stressed the imperativeness of enhancing the internal rate of return (IRR) of these projects to attract higher levels of funding. It strongly recommended that measures such as the Insolvency & Bankruptcy Code (IBC) should be considered only as a last resort. The process of project resolution, the committee emphasised, should ideally culminate in a win-win scenario for all stakeholders, including developers, financiers, and land authorities.
To ensure financial viability, the committee has advocated a "haircut" approach, whereby all stakeholders would proportionately reduce their financial obligations. To streamline fund allocation, the committee has proposed the establishment of project-specific escrow accounts under the purview of RERA (Real Estate Regulatory Authority). These accounts would operate based on a "waterfall mechanism," prioritising fund allocation for project completion. Subsequently, the disbursal of funds to financial institutions, land authorities, and other relevant entities would be determined by their respective dues, ensuring an equitable distribution.
Mitigating financial strain induced by extraordinary circumstances such as the Covid-19 pandemic, the committee suggested implementing a "zero period." During this phase, interest and penalties would be suspended, the committee noted. Calculating interest based on the 3-year Marginal Cost of Funds-based Lending Rate (MCLR) was proposed to ensure uniformity and fairness in interest rates for all developers.
As these recommendations are set in motion, it is essential to acknowledge the potential financial impact on authorities like Noida and Greater Noida. The proposed "zero period policy" and haircut approach might necessitate these authorities to forgo substantial sums of money. As a point of illustration, Noida might need to relinquish Rs 7,400 crore, while Greater Noida could be looking at foregoing approximately Rs 6,000 crore. However, these actions are crucial for the collective goal of reviving the stagnant real estate sector and ushering in broader economic prosperity.
Getamber Anand, former chairman, CREDAI and chairman, ATS Infrastructure said: “’The zero period policy’ of Noida may be re-introduced for the time period which was affected due to farmer’s agitation and pendency of this dispute before
the hon’ble high court etc. This would make many projects viable and would result in restarting of the construction work in many projects.” This was seconded by Manoj Gaur, Chairman, CREDAI. “The removal of provisions for capitalisation of interest by Noida may help in making the projects viable,” says Gaur.
Rajan Bandelkar, President, NAREDCO too supports the re-introduction of zero period policy. “The development authorities should also be brought under the ambit of RERA so that the requisite approval of clearances is processed in a time bound manner,” he says.
The committee has accepted suggestions and is recommending its implementation now. “The state governments could examine and provide further zero periods based on the local conditions/circumstances,” the committee said.
Sales Impacted
A recent report by Proptiger.com, owned by REA India, on the April-June sales of housing units across eight major markets show a quarter-on-quarter (QoQ) decline in the sales across major cities like Delhi-NCR, MMR, Hyderabad, Bengaluru and Kolkata. The overall combined QoQ sales declined 7 per cent. However, on an annual comparison, sales was up 8 per cent led by double-digit growth in only two markets, MMR and Pune. With the central bank continuing to pause any further increase in interest rates, the housing market is now looking ahead at the festival season/Diwali period with expectations.
“This move (to keep the rates unchanged) might also serve to boost sentiment in the lead-up to the festive season, which is an important time for the real estate industry," says Dhruv Agarwala, Group CEO, Housing.com, Proptiger.com, and Makaan.com.
Now, all eyes are on the upcoming festive seasons. Developers are lining up projects with attractive schemes and marketing slogans to lure homebuyers to invest in housing projects. But high interest rates, rising inflation and economic uncertainties may play spoilsport.
