The Affordable Housing Opportunity

Our evolution & subsequent battle for survival for thousands of years has ingrained within the human species a desire to have a safe space where one isn’t physically attacked. The very first human homes were, unsurprisingly, caves & shelters provided by the nearby environment. Then later at some point, we devised ways to use animal skins to make tents, thus having a portable, albeit temporary, homes.

The modern four-walled “houses” first started appearing at the onset of the Agricultural Revolution, about 10,000 years ago. The accidental discovery of farming brought with it a new lifestyle for the hunter-gatherer humans, who now needed to be more “settled” in order to grow & maintain their farms. These were more permanent settlements that not only provided quick access to farmland but also safety from the various threatening predators around then.

After approximately 10,000 years of building houses, the idea of having one’s own house has become very deep-rooted in communities & cultures across the globe.

In India, the desire and obsession with having your own house are equally strong. In fact, for many, including some in my family, owning a house is one of their key goals in life. While many urban millennials might not feel this as strongly, I’m confident that even they would’ve been strongly advised to do so by at least one of their elders. But despite the views of some urban millennials, the vast majority of Indians still have an innate desire & ambition to own a house.

The biggest roadblock for the vast majority to achieve this is affordability. Houses don’t come for free in our modern society. Pretty much nothing does, leave aside houses! This makes the dream of owning a house difficult for many, and almost impossible for most who belong to the lower-income segment.

In an attempt to help realise this aspiration of those who are truly unable to afford it, the Government launched the Pradhan Mantri Awas Yojana (PMAY) in 2015.

Government support to Affordable Housing

The PMAY started with an objective of building 2 crore (20 million) affordable houses over a period of 7 years for the lower income segment. All existing and future housing units that come under this scheme are referred to as “affordable housing“. And since its inception in 2015, the PMAY has continued to remain a policy focus for the Government – each subsequent Budget has not only emphasised on it, but also increased the funding earmarked for this project.

Let’s take a quick look at the key developments the Government has initiated under PMAY to boost the affordable housing projects:

1. After launching with an initial corpus of ₹1,231 crores, allocation to PMAY was increased by more than 300% in Budget 2016 to ₹5,075 crores
2. Budget 2017 granted ‘infrastructure status’ to affordable housing projects – it ensured lower cost of borrowing for developers, thus encouraging them to take such projects
3. When GST was implemented in 2017, there were fears that this would impact the construction & sale of various such affordable housing projects. But the Government addressed those concerns in Budget 2018-19, when it reduced the GST rates to 1% for housing projects that fall under the PMAY
4. To further incentivise developers, the Govt. tweaked the income-tax laws such that developers involved with PMAY projects can also claim 100% deduction on profits from affordable housing projects, provided they are completed within 5 years (this has been extended from an earlier 3 years)
5. In her first Budget, FM Nirmala Sitharam announced an additional deduction of up to ₹1,50,000 on interest paid on home loans borrowed for the purchase of an affordable house valued up to ₹45 lakh
6. Most recently in Budget 2020-21, the allocation to PMAY was again increased, this time by 8% to ₹27,500 crores

An Affordable Investment Opportunity

According to the government, 32 lakh houses in urban areas & 47 lakh houses in rural areas have been built & handed over, as of Feb 2020. Hardeep Singh Puri, Union Minister for Housing & Urban Affairs, recently said in the Rajya Sabha that the government will sanction the remaining approx. 1.12 crore houses under the Pradhan Mantri Awas Yojana (PMAY) by March 2020. These units are expected to be constructed & handed over the next 3 years.

The houses sanctioned so far under PMAY have already seen an investment of approx. ₹5.70 lakh crore, with central assistance of ₹1.6 lakh crore. Out of that, nearly ₹60,000 crore of central assistance has already been released as of December 2019.

PS: read this article if you’re interested in learning more about the PMAY scheme, its eligibility criteria, the various benefits, available financing options, etc.

After 5 years of learning the unique challenges that come with running such a vast housing program, the current Govt. is today well-positioned to go ahead full steam in implementing the remaining phases of this scheme. Rewarding incentives are now in place for developers & buyers alike, and these are over and above the broader stimulus the Govt. is providing to the real estate sector.

The reduced borrowing costs, the 100% profit tax-break, and the other mentioned subsidies & incentives create a massive opportunity for developers that are specifically working on such affordable housing projects. The resulting activities will also stimulate demand for associated products from industries like cement, ceramics, paints, housing finance, etc.

Seeing this opportunity, the Affordable Housing smallcase was created. It consists of such companies that stand to benefit from the construction and sale of ongoing and future affordable housing projects.

With about halfway to go for the completion of the remainder projects, the smallcase provides a niche exposure to a specific part of the real estate market and associated industries.

And with a minimum investment of approximately ₹30,000 – the smallcase itself is far more affordable than the houses themselves.. Happy investing!

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