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Fri, 5 Jan 2018 | Private Debt Investor
Private Debt Investor: Indian investors knocking on affordable housing door

Indian investors knocking on affordable housing door

Doubts over profitability and scalability have plagued the sector but, as the banks retreat, non-banks are spying an opportunity.


The government of India announced a massive campaign back in 2014 that would require over $2 trillion of investments for developing 10 million houses to provide affordable housing to all its citizens by 2022.

The shortage of housing in the urban regions during 2012 to 2017 was estimated at 18.8 million units, of which over 95 percent is attributed to the economically weaker and lower income group categories, according to the Ministry of Housing and Urban Poverty Alleviation.

The Indian government has been offering favourable policies for borrowers and real estate investors to boost participation in the market, alleviate the shortage of housing and boost economic growth.

For instance, middle class home buyers with mortgages are eligible for tax incentives in the form of subsidies based on their interest costs, according to the new Credit Linked Subsidy Scheme (CLSS) announced by the Ministry of Housing and Urban Poverty Alleviation in May 2017.

For institutional investors, the government is offering tax benefits. A ‘tax pass-through’ status has been extended to category II Alternative Investment Funds (AIFs) with real estate funds, private equity funds, funds for distressed assets and their investors the beneficiaries.

Despite accommodating policies for borrowers and institutional investors, the affordable housing sector has been under pressure with tight profit margins reported by developers.

“The affordable housing segment has been underserved by the organized real estate developers in the past owing to the price-sensitive customer base, constrained margins and high land prices in urban centers,” Shubham Jain, vice president of the corporate rating department at ICRA, Moody’s affiliate in India, told Private Debt Investor.

The segment has underperformed over the last three years as home buyers are price-sensitive and most of the developers do not focus on affordable housing due to the constraints on the profitability of projects.

Asked if any developer might take the cheapest option for construction materials to alleviate tight profit margins, ICRA said: “With regulations like Real Estate (Regulation and Development) Act, 2016 coming into force as of May 2017, the developers may find it difficult to deliver a sub-standard product.”

“However, the trends and investment sentiment among developers and lenders are changing given various subsidies and tax incentives provided by the government to developers as well as home buyers in the affordable housing sector,” Jain added.

Given that gross margins can be comparatively lower, faster turnaround of projects and increase in scale to absorb overheads are critical success factors for developers in affordable housing, ICRA told PDI, noting that typical gross margin rates of affordable housing projects can vary from 10 percent to 25 percent.

It is a niche market within structured financing as the underlying assets for affordable housing loans and their risk profiles present difficulties in underwriting given the nature of the borrowers, according to analysts at Moody’s.

Dipanshu Rustagi, assistant vice president analyst at the structured finance group of Moody’s told PDI on December 20 that “commercial vehicle loans and auto loans are the main asset classes that support the stable market volume of Indian structured finance”.


The main source of capital for the affordable housing sector comes from non-banking financial companies and alternative investment managers as banks are retreating from risky loans to comply with regulations.

The real estate investment trusts (REITs) market in India is not active with no vehicles registered as of end-2017 per the latest report from SEBI published on January 3.

Among asset managers which are active in the Indian real estate market, IIFL Investment Managers, the wealth and asset management business of IIFL Holdings Ltd, debuted in affordable housing financing via its latest real estate debt fund, targeting over $500 million.

“Investors’ approach to the Indian capital market has shifted towards secured-debt strategies including providing credit to developers for project specific requirements,” Balaji Raghavan, chief investment officer of Real Estate Investments and fund manager for India Housing Fund at IIFL Asset Management said in an interview with PDI on November 30.

“The growing middle class in India with annual salaries ranging from INR3.5 million to INR5 million and their needs for affordable housing draw our attention to investing in the sector,” Raghavan said, adding that the new vehicle also aims at providing a platform for property developers who need sufficient liquidity.

“Since 2009, post-crisis, alternative investors’ sentiment towards Indian [private] market has been changed as investment managers are aiming at filling the void between capital supply and demand amid strengthened regulatory environment in banking sector,” Raghavan added.

One of the main housing finance corporations in India, HDFC Capital Advisors, also held a first close on its second affordable housing fund at $550 million, garnering $1 billion from its debut housing fund in 2016.

“Affordable housing will not only act as a growth driver for the real estate industry in India but will also be a catalyst for GDP growth,” said Deepak Parekh, chairman of HDFC, as per a report by sister publication PERE .

“There is real demand for affordable housing in India,” Neeraj Bansal, partner and head of ASEAN corridor and building, construction and real estate at KPMG India told PDI on December 19.

Despite the weak performance of developers in the real estate industry, $7.1 billion of capital inflows from institutional investors were recorded in 2016, up from $5.2 billion in 2013, according to KPMG.

“We have seen decent investment opportunities [in the real estate debt market] in India this year and we expect it to grow in the next three to five years,” Bansal told PDI on December 20.

“The big challenges [in the affordable housing sector] are expensive urban land, the construction approval process and cost of capital,” he added.