Shelter for all?

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Shelter for all?

Sunday, 05 September 2021 | Dhaval Monani & Prasanna Sriraman

Shelter for all?

Regressive policies and an over-inflated real estate market have made residential rentals an unviable proposition for businesses in India, write Dhaval Monani & Prasanna Sriraman, as they discuss the challenges in the affordable rental housing complex scheme in the first of four part series

Rental housing is an integral part of a robust housing market. Making rental housing accessible and affordable can facilitate migration-led development and movement of talent across the rural-urban spectrum. Europe sees a healthy inter-country and cross border migration with some of the largest percentages of rental housing with Switzerland leading the way at about 59%.

India has always struggled with providing rental housing solutions to low-income families. Regressive policies and an over-inflated real estate market have made residential rentals an unviable proposition for businesses. A high risk-free rate and high real estate prices reduce the net yield on residential rental to as low as 2-3% across the country as brought out in the Knight Frank-Khaitan & CO report circa 2019. The market relies largely on capital appreciation for returns. The problem is further magnified for the low-income segment as the capital appreciation of such assets is much lower. This leads to higher rental costs making it unaffordable for the urban poor, especially migrants, to find decent homes. As a result, informal settlements and overcrowded accommodation proliferate in cities across the country with millions living in inadequate dwellings.

While the situation has long been dire, the Covid-19 crisis brought these housing inadequacies into focus, with decent shelter coming to the fore in both public health and families’ livelihoods. When lockdowns upended the informal economy, workers’ need for stable housing, along with job and income loss contributed to the largest reverse migration in decades. Cognisant of the unfolding humanitarian crisis, the Government of India put forward the Affordable Rental Housing Complex (ARHC) scheme.

The scheme aims to increase the supply of affordable rental accommodation in urban and peri-urban areas. It intends to achieve this by focusing on Public-Private-Partnership models, thereby minimising the impact on government finances.

There are two models under the scheme. In the first model, the Urban Local Body provides existing government owned vacant houses to private entities through a concession agreement for 25 years. The concessionaire is to upgrade, operate and maintain the building during the period while collecting rent.

In the second model, the concessionaire is given incentives to construct and operate ARHCs on its own vacant land as greenfield developments. Greenfield ARHCs are incentivised through 50% higher Floor Space Index and financed at lower interest rates through priority sector lending. Additionally, the concessionaire is allowed to commercially rent a certain portion of the complex to cross-subsidise development.

The scheme marks an important shift in the governments housing policy to rental housing models. However, the adequacy of incentives proposed in the scheme is yet unproven to make ARHCs attractive to investors, developers and businesses.

Let us consider the cost per unit for both models. We consider 150 sq. ft of built-up area per person including common areas, and assume Rs 500 per sq. ft as the cost for refurbishment. In the first model, the total cost per person is Rs 75,000. Assuming Rs 60,000 as debt at 10% for a tenure of 10 years, the cost would be Rs 1,000 per person per month. We estimate monthly housekeeping at a minimum of Rs 1,000 per person. Considering varied occupancy levels and access issues, a private entity would most likely set rental prices at Rs 2,500 to Rs 3,000 per person. With most migrant workers earning an average monthly income ranging from Rs 7,000 to Rs 9,000, the expected rent structure would be unaffordable.

In the greenfield model, the concessionaire contributes land in addition to undertaking construction and management of the property. Assuming an FSI cost of Rs 500 per sq. ft and construction cost of Rs 1,500 per sq. ft - 150 sq. ft of built-up area per person would cost Rs 3,00,000. Assuming 80% debt at 10% and 20% equity at 20%, the cost per person would be Rs 3,000 per month. Adding maintenance costs of Rs 1,000 and a 20% margin, the rental per person works out to Rs 5,000 per month. Here we consider 100% occupancy.

If the ULB were to stipulate a rent of Rs 1,500 per month and we consider Rs 500 per month as a cross-subsidy from the commercial portion, the concessionaire will still incur a loss of Rs 3,000 per month or Rs 36,000 per person annually. To bridge this gap, a Viability Gap Funding Rs 36,000/per year would be needed. This will amount to a VGF funding of Rs 36,000 crore annually if the scheme aims to reach 1 crore target beneficiaries. These are important challenges in ARHC as the operator faces poor financial returns and the government faces an enormous subsidy requirement.

In conclusion, the ARHC scheme is an important milestone in India’s housing policy that acknowledges the significance of increasing the availability of affordable rental housing for the urban poor and migrants. However, in its current form, it fails to account for the cost of implementation and implications on requisite returns for private entities. The scheme is pragmatic in mandating the local governments to provide the necessary infrastructure, and putting existing property resources — housing stock and land — to greater use, but in allowing local bodies to decide the rental rates, the scheme falls short of being a more market-based intervention. It also falls short of recognising and fully accounting for the high cost of business in the real estate development sector, variable occupancy levels, location constraints and low cost-to-benefit returns for private entities in an already low rental yield market. When millions of urban poor and migrant labour rely on rental property to fulfil their housing needs, albeit, with fewer choices, it is critical to continue developing comprehensive and effective measures ensuring that they have a decent place to live. The government’s increased commitment to supporting and strengthening the housing sector brings significant promise, and we urge the reconsideration of the financial model behind the ARHC scheme to address viability concerns and to achieve intended outcomes.

Monani is Director of Affordable Housing at Anant National University and Sriraman is a Senior Specialist — Market Systems at the Habitat for Humanity’s Terwilliger Center for Innovation in Shelter

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