Indian house sector carried by lower end

With India's rapid economic growth boosting wages, members of the country's growing lower-middle classes are fulfilling dreams of home ownership

Locals hold house-related lottery papers, above, as they watch the results for the MHADA lottery in Mumbai.

For nearly a decade, the school teacher Prabhakar Shinde scrounged together money from his meagre earnings to make his dream come true. That dream was to own a house in Mumbai, India's crowded commercial capital, where property is sometimes more expensive than in mid-town Manhattan.

Last week, Mr Shinde finally realised it. The Maharashtra Housing and Area Development Authority (MHADA), a government-run housing board, has offered him a home at a price he can afford - a 437 square foot flat priced at 330,000 rupees (Dh25,857) to be paid in easy instalments. "This is a moment I have waited for a long time, to graduate from a tenant to an owner," says Mr Shinde, 35, who lives with his wife and son in a shabby tenement block overlooking a slum.

The hugely oversubscribed scheme invited applications from about 400,000 people for 3,449 apartments. The lucky ones, including Mr Shinde, were picked through a computerised lottery. Given this ravenous demand for affordable housing in India, it is not just the government but also private developers who are increasingly catering to the budding consumer base at the bottom of India's economic pyramid that was bypassed by the previous housing boom.

The Tata group, which last year launched the world's cheapest car - the bubble-shaped Nano - announced plans in May last year to build Nano Homes to cater to the low-income segment. It is building 1,300 tiny one-room apartments on 27 hectares in Boisar, about 100km outside Mumbai, starting at 390,000 rupees. The company also plans to launch low-cost housing projects outside other major Indian cities.

In the past decade, India's rapid economic growth gave birth to a housing boom built around the country's emerging middle class of 300 million high-earning, high-spending urban people. The country's construction industry made its profits by building top-end apartment buildings and shiny high rises for this burgeoning section of Indian society. Housing prices rose 16 per cent a year for the past four years.

But the global economic downturn has knocked this once booming industry back on its heels. Property companies, which had a severe decline in sales, were compelled to cater to a long-ignored but thriving consumer base. There are at least 23 million urban families from India's middle and lower-middle income groups, whose earnings range between 60,000 and 130,000 rupees and who live in slums and low-income neighbourhoods, according to Monitor India, a Mumbai-based research firm.

They aspire to live in homes of between 250 and 600 sq ft in the suburbs. With rural households in that income bracket, that number swells to 180 million families. Despite years of economic growth, this country of 1.17 billion people faces an acute housing shortage. India's cities need at least 25 million more homes to satisfy current demand, according to a report from the consultancy McKinsey and the Federation of Indian Chambers of Commerce.

India's planning commission estimates that between 80 million and 90 million new units will be needed over the next decade to meet this surging demand. RNCOS, a market research company based in New Delhi, says affordable housing will be the main driver of growth of India's construction industry in the next decade, and the segment is expected to grow to US$100 billion (Dh367.29bn) by 2013, accounting for 80 per cent of India's total housing demand.

"Property developers have recognised that the real demand no longer lies in the premium segment and are, therefore, opting to build smaller, no-frills apartments," Deepak Parekh, the chairman of the Housing Development Finance Corporation (HDFC), wrote to shareholders last year. But affordable housing became prominent in the property market during the economic crisis, when developers struggled to find buyers in the mid-income category.

Now as India's economy rebounds more swiftly than most developed economies, this segment is slowly losing its appeal, some analysts say. "Post the initial euphoria during early 2009, the affordable segment has witnessed a gradual decline in absorption levels," said a report released this month by PropEquity, a property consultancy in New Delhi. The report points out that mid-segment housing, which ranges between 3 million and 7.5m rupees, drives the property market with rising sales.

"New launches in the coming months would be in the higher price range," says Samir Jasuja, the managing director of PropEquity. "There is also a genuine demand for the mid-housing in the market." Sales of affordable housing units have steadily declined since India's economy began recovering. Sales in Mumbai dipped to 2,474 in the first quarter this year from a high of 4,396 units in the final quarter of last year.

In Gurgaon, a town bustling with commercial property developments next to New Delhi, sales declined to 3,635 units in the previous quarter from 5,642 units in the final quarter of last year. There are also several concerns about their poor quality of construction. Most affordable housing projects promote tiny apartments with frugal designs, compromising on bathroom taps and kitchen fittings to save costs.

Tata's Nano Homes, for instance, are available in three sizes, with the smallest being only 218 sq ft for 390,000 rupees. It comprises a single room that doubles as the living room and bedroom. It has a sink in one corner and a toilet built behind a partition. Many buyers of MHADA's low-cost houses complain of poorly built houses with paper-thin walls that compromise the privacy of residents in apartments tightly packed together.

These apartments are being built on the outskirts of big cities, where land is considerably cheaper. Homeowners may have to commute long distances to work in cities. "Affordable housing is not about box-sized, budget homes in far-flung places where there is no connectivity to work places and little surrounding infrastructure," Deepak Parekh said in the letter to shareholders. "Affordable housing has to be able to cut across all income segments and has to make economic sense in terms of proximity to the work place."

But the government is pinning its hopes on the affordable housing sector to put a roof over the heads of millions of the country's urban Indians. In his annual budget last year, Pranab Mukherjee, the country's minister of finance, announced an interest subsidy of 1 per cent for a one-year housing loan of up to 1m rupees. In this year's budget, Mr Mukherjee announced an extension of the scheme by one year.

By some estimates, India will house more than 40 per cent of its rapidly expanding population in urban areas by 2030. In Mumbai, more than 8 million people live in shanty towns, often in sub-human conditions. Dharavi, a slum known as Asia's largest, is home to more than 1 million people. Most of its residents are migrants. Sanitation facilities in slums such as Dharavi are scarce, with one toilet for every 1,500 people, the World Bank says. Drinking water is in short supply as families of 15 share one water tap.

"State supply of housing for the poor is woefully inadequate in relation to the need," says Sundar Burra, an adviser to the housing rights group Society for the Promotion of Area Resource Centre in Mumbai. "Slums proliferate as a solution to this state of affairs and slum dwellers live in conditions of deep privation. India's housing crisis lies in the fact that the poor in the cities are priced out of the market."

Anuj Puri is the chairman and Indian head of the property services company Jones Lang LaSalle Meghraj. India faces a chronic housing shortage. A large number of India's urban poor aspire to own a house but are deterred by high property prices. Is affordable housing a likely saviour? The definition of affordable would means different things for different people, depending on their income levels and socio-economic status. As of now, affordable housing projects are seen only on the outskirts of large cities. We do not see such efforts being launched in more central locations. In large cities like Delhi, Mumbai, Chennai, Bangalore, Hyderabad and Kolkata and smaller towns like Ludhiana and Nasik, there is a growing demand for two-bedroom format houses, which are scarcely available at affordable prices. Affordable housing became the mainstay of property developers during the economic crisis. Does the same hold true now that India's economy is swiftly recovering? It seemed so two quarters ago, but the scenario has changed since then. Firstly, middle-income homes are selling again and developers are once again focusing on this segment, which offers higher profit margins. Secondly, it is difficult for builders to develop affordable housing within larger cities due to high land prices. Developers won't build such projects compromising on profit margins. This year's national budget offered plenty of fiscal incentives to the developers to focus on building homes for low-income groups. Does the government's thrust on affordable housing help developers? The government must promote redevelopment of old buildings within cities or provide world-class infrastructure in suburban locations where people can reside and still commute to cities for work with ease. It can decongest large cities by developing large land parcels located outside them. [e-mail]