‘Affordable Housing Schemes’ – what they don’t tell you

In August 2013, Haryana Government notified the ‘Haryana Affordable Housing Scheme’. A buyer-starved Gurugram Real Estate market latched on to this scheme and started launching project after project, keeping ‘Affordable’ as the buzz word. How did the government achieve this miracle of making housing affordable by simply drafting a policy?

LET’S UNDERSTAND WHAT THIS ‘AFFORDABLE’ HOUSING SCHEME ENTAILS 

#1: Reduced minimum land requirement for a group housing project from 10 acres to 5 acres. Impact: Reduced financial burden for purchase of land.

#2: Increase in Floor Area Ration (FAR) from 1.75 to 2.25 acres. Developers would therefore be able to build 98,010 sq ft as against 76,230 sq ft earlier. Impact: More apartments per acre.

#3: Density increased from 450 PPA to 900 PPA (assuming 5 persons per dwelling unit). While developers were unable to fully utilize the FAR of 1.75 due to lower density norms, they would now be able to utilize the entire 2.25 FAR due to increased density allowance. Impact: More apartments per acre. To give you a measure of the impact, against 48 apartments per acre earlier, now a developer can construct 110+ apartments per acre.

#4: No EWS in a society to reduce element of cross subsidy.

#5: No Dedicated Car Parking. Space for car parking to be allocated at the rate of half the number of dwelling units. Impact: Highly unlikely for any affordable housing project to have basement car parking. Parking space and internal traffic management would be a cause for concern.

#6: Reduction in common amenities. Community hall and Crèche size capped at 2000 sq ft each. No provision for other amenities. Impact: Comparatively less enjoyable residential experience.

#7: Allotment by draw. One family (either spouse), one allotment. Impact: A second unit for a family under this scheme would be deemed illegal.

#8: Waiver of IDC and License Fee for developer. Impact: Reduced cost of development.

#9: Price fixed at INR 4000 per sq ft of carpet area.

Houses under the affordable scheme are expected to be like no-frills bank accounts i.e. quite basic. Closest examples would be the 1BHK and 2BHK DDA apartments developed in Rohini, Janakpuri, Dwarka, Mayur Vihar etc. Specifications will be bare minimum with the buyer spending money to upgrade interiors as per his/her liking, requirements and spending capacity.

THERE ARE INHERENT RISKS ATTACHED WITH SUCH A SCHEME

Government has capped the price at INR 4000 per sq ft. However, the land and building materials have to be purchased from the open market, the payment plan is time linked, and government has imposed a bank guarantee @ 15% of the estimated project cost to ensure the developer performs as promised. Government has tried to offset the impact of bank guarantee by giving a waiver on the last instalment of the EDC if the construction is completed within 3.5 years of commencement.

This means that the developer has very low ‘Margin of Safety’ under the provisions of this scheme. Let me do some back-of-the-envelope number crunching to explain this. Consider the following:

  • Cost of Land = INR 1000 to 1200 per sq ft
  • Cost of Construction / Development = INR 1500 per sq ft
  • Cost of Money (Finance cost) = INR 300 per sq ft
  • EDC = INR 250 per sq ft
  • Admin and Sales/Marketing Cost = INR 100 per sq ft
  • Total = INR 3150 per sq ft

With the price cap at INR 4000 per sq ft, developer’s profit margin is very narrow, leaving him little room to manoeuvre in case of any project-related problem(s). This is probably the reason why many big developers have shied away from participating in this scheme. And first time developers can be highly risky. The product could end up being of inferior quality or may not get delivered at all.

WORD OF CAUTION

The baseline used in advertisements for projects under this scheme is ‘Government approved affordable housing scheme’. It should not be mistaken for a guarantee by the government for builder performance or quality.

The affordable housing in its present form is definitely risky. Therefore, buyers are cautioned to conduct a detailed analysis of the developer’s capacity, intent and integrity to deliver as per government’s policy before investing in it.