Why is affordable housing the best investment option for both buyers and investors in India?
The focus on affordable housing in India has increased considerably in recent years due to the various incentives and schemes backed by the government. Also, as icing on the cake, mortgage loans have become cheaper. Therefore, this is a good time when a number of investors and home buyers are shopping for affordable homes in India. The 2017 Union Budget announced that affordable housing would be the main basis for developing “infrastructure” in the country. Companies that are dedicated to offering affordable housing can receive cheaper loans from different nationalized banks and also certain tax concessions. Also, various foreign funds are coming in which are significantly boosting the infrastructure sector in India. With this particular move, the Indian government aims to provide a huge boost to the infrastructure sector in India.
There are several property buyers in India who dream of owning their own houses on an affordable budget. Some of these buyers aim to purchase affordable homes for residential purposes, while others intend to purchase these properties as an investment avenue. In case you are one of the many Indians who are planning to buy an affordable home, it is time to think this through before you buy.
According to a survey report published by the reputable real estate consultancy Monitor Deloitte, affordable housing projects are a very profitable business proposition for developers. In most major cities in India like Mumbai and Delhi, the internal rate of return (IRR) is 45% and there is a gross margin of 24%. Therefore, taking on affordable housing projects by developers is a lucrative proposition for them. Needless to say, there are many private builder organizations that are rapidly entering this segment in recent years.
Special initiatives to boost affordable housing in India
Some of the recent initiatives taken by the union government in India regarding affordable housing during the Union Budget are discussed in the following points:
• In the past, developers often complained about the high interest rates they had to pay on their loans to develop real estate projects. The infrastructure tag that has been introduced by the Indian government that makes it easy for developers and builders to get loans at much lower and attractive rates to develop affordable housing projects.
• Apart from the proposed ‘infrastructure tag’ for the Union budget, there have been various allocations and there are various housing schemes that have been introduced by the Indian government. One of the most important and popular investment schemes that increases the budget for affordable housing is the Pradhan Mantri Awaas Yojna. The budget of this government housing scheme was increased from Rs 15,000 crore to Rs 23,000 crore in the 2017-2018 financial year. This is an increase that reaches 50%.
• In order to further encourage investment in housing, the long-term equity tenure has been significantly reduced from a three-year term to a two-year term. So, if you’re willing to buy a property in affordable housing for investment purposes, you can sell the property right after two years and then claim some long-term capital gains that have indexing benefits. This would also encourage several people who are looking for properties with low and medium term investments.
• There is an interest subsidy offer of 3% on home loans up to Rs 12 lakh and an interest subsidy of 4% on loans up to Rs 9 lakh. Individual affordable home buyers who are willing to purchase a property in affordable homes can avail this subsidy benefit if their income is less than Rs 6 lakh per year. They have the option of borrowing Rs 20-30 lakh at most. This range of amounts constitutes about two-thirds of the amount of mortgage loans that are being disbursed by banks. Therefore, the industry expects these specific steps to boost the growth of the Indian real estate scene in the currently subdued real estate sector.
Top factors to consider if you are considering affordable housing from an investment standpoint
Let’s take a quick look at some of the factors that determine the overall potential returns you can earn from an affordable home investment. Since the investment option mostly involves large amounts, it is advisable to carefully analyze both the reward and the risk factors related to the project.
• Infrastructure: A well planned infrastructure close to the property site is very essential for the property price to appreciate. Infrastructure such as the availability of power and water, good wide roads, schools and hospitals are important things to consider. These are the main factors that help to obtain an appreciated resale value. While schools, hospitals, and other services may take some time to develop, basics like water, power, etc. they must necessarily be present at the time the property is being considered.
• Location: This is one of the most crucial factors that must be considered when planning a real estate investment. Ideally, you should buy in those places where the growth prospects are greatest in the near future. You may also consider paying a premium when you get certain prime placements.
• Smart City Label: Finally, cities that have the ‘smart’ label would certainly be an excellent choice for affordable housing investment. The Indian government identifies 100 cities that would be developed as smart cities. These particular cities are bound to possess all the required infrastructure and within a few years these cities are expected to expand as the largest urban cities in India. In fact, there is great growth potential for such cities and therein lie great opportunities and prospects for long-term profitability.