Regressive policies and a bloated real estate market have made residential leasing an unsustainable proposition for businesses in India, write Dhaval Monani and Prasanna Sriraman, as they discuss the challenges of the affordable rental housing complex program in the first of four series
Rental housing is an integral part of a robust housing market. Making rental housing accessible and affordable can facilitate migration-driven development and the movement of talent across the rural-urban spectrum. Europe is experiencing healthy international and cross-border migration with some of the highest percentages of rental housing, led by Switzerland at around 59%.
India has historically struggled to provide rental housing solutions to low income families. Regressive policies and a bloated real estate market have made residential leasing an unsustainable proposition for businesses. A high risk-free rate and high real estate prices are reducing the net return on residential rental to as low as 2-3% nationwide, as seen in the Knight Frank-Khaitan & CO report circa 2019. The market is resting largely on capital. appreciation of feedback. The problem is further magnified for the low income segment as the capital appreciation of these assets is much lower. This leads to higher rental costs, making it unaffordable for the urban poor, especially migrants, to find decent housing. As a result, informal settlements and overcrowded housing are proliferating in cities across the country, with millions living in inadequate housing.
While the situation has long been dire, the Covid-19 crisis has brought these housing shortfalls to light, with decent housing at the forefront of both public health and family livelihoods. When the closures disrupted the informal economy, workers’ need for stable housing, along with the loss of jobs and income, contributed to the largest reverse migration in decades. Recognizing the ongoing humanitarian crisis, the Indian government has proposed the Affordable Rental Housing Complex (ARHC) program.
The program aims to increase the supply of affordable rental housing in urban and peri-urban areas. It intends to achieve this by focusing on public-private partnership models, thereby minimizing the impact on public finances.
There are two models under the scheme. In the first model, the urban local body provides vacant government-owned housing to private entities through a 25-year concession agreement. The concessionaire must modernize, operate and maintain the building during the period while collecting the rents.
In the second model, the concessionaire is incentivized to build and operate ARHCs on their own vacant lots as new developments. ARHC Greenfields are incentivized by a 50% higher floor space index and financed at lower interest rates through priority sector loans. In addition, the concessionaire is allowed to commercially lease a certain part of the complex to subsidize the development.
The program marks a significant shift in government housing policy towards rental housing models. However, the adequacy of the incentives offered in the program is not yet proven to make ARHCs attractive to investors, developers and businesses.
Consider the unit cost for the two models. We consider 150 square feet of built-up area per person including common areas and assume the cost of the renovation is Rs 500 per square foot. In the first model, the total cost per person is Rs 75,000. Assuming that Rs 60,000 is 10% debt for 10 years, the cost would be Rs 1,000 per person per month. We estimate the monthly cleaning at a minimum of Rs 1,000 per person. Given the different 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 the land in addition to undertaking construction and management of the property. Assuming an FSI cost of Rs 500 per square foot and a construction cost of Rs 1,500 per square foot – 150 square feet of built-up area per person would cost Rs 3,000,000. Assuming 80% to 10% debt and debts equity from 20% to 20%, the cost per person would be Rs 3,000 per month. By adding maintenance costs of Rs 1,000 and a margin of 20%, the rental per person comes to Rs 5,000 per month. Here we consider 100% occupancy.
If the ULB stipulated a rent of Rs 1,500 per month and we consider Rs 500 per month as a cross-subsidy of the commercial part, the concessionaire will still suffer a loss of Rs 3,000 per month or Rs 36,000 per person annually. To close this gap, sustainability gap funding of Rs 36,000 per year would be required. This will equate to VGF funding of Rs 36,000 crore per year if the program aims to reach 1 crore of target beneficiaries. These are significant challenges in ARHC as the operator faces low financial returns and the government faces huge subsidy needs.
In conclusion, the ARHC program is an important step in India’s housing policy which recognizes the importance of increasing the availability of affordable rental housing for the urban poor and migrants. However, in its current form, it does not take into account the cost of implementation and the implications on the returns required for private entities. The program is pragmatic in forcing local governments to provide the necessary infrastructure and make greater use of existing real estate resources – housing stock and land – but by allowing local bodies to decide on rental rates, the program is not a more market-based intervention. It also fails to recognize and fully take into account the high cost of doing business in the property development industry, varying occupancy levels, location constraints, and low cost-benefit returns for private entities. in an already weak rental yield market. When millions of the urban poor and migrant workers depend on rental property to meet their housing needs, albeit with fewer choices, it is essential to continue to develop comprehensive and effective measures to ensure they have a place. decent where to live. The government’s increased commitment to support and strengthen the housing sector shows great promise, and we urge to reconsider the financial model that underpins the ARHC program in order to address sustainability issues and achieve expected results.
Monani is Director of Affordable Housing at Anant National University and Sriraman is Senior Market Systems Specialist at the Terwilliger Center for Innovation in Shelter at Habitat for Humanity.