CRISIL SME Tracker: For EPC players, affordable housing is a natural fit

Recent regulatory measures promoting affordable housing, as part of the government’s mission of providing housing for all by 2022 — the 75th year of Independence — have paved the path for entry of engineering procurement and construction (EPC) companies into the segment. 

Recent years have seen a raft of government policies and programmes, supported by budgetary measures, to spur affordable housing. These include extension of the project completion period for claiming deduction of tax on profits from three to five years, grant of infrastructure status to affordable housing, and extension of the tenure of loans provided under the Credit-Linked Subsidy Scheme of the Pradhan Mantri Awas Yojana. 

This affords huge scope for developers — meeting the government’s target of construction of 12 million units by 2022 requires construction of about three million units per year in urban areas.

However, the core business model of traditional developers is centred on the creation of land value, development of micro-markets, working on high margins, and catering to higher-segment projects. Their model for construction typically involves either local contractors or in-house civil teams (which again could have multiple petty contractors) for small-sized projects, and EPC players for large-sized ones. 

They have been cautious in taking up low-margin, high-volume affordable housing projects, which require stricter adherence to project management, quality, and construction timelines. For developers, involving EPC players impacts the already thin margins in affordable housing projects and involving multiple small contractors for a single project requires building/hiring a strong team of project management consultants, which adds to costs, impacting margins.

CRISIL therefore believes EPC companies are best placed to build affordable housing projects. They have an edge over traditional developers in handling large-sized projects given good project management skills (planning, mobilising resources, labour and material) and the capabilities required for execution within tight timelines.

That said, EPC players could face challenges in identifying the right land parcels, exposure to land acquisition process, obtaining required approvals, marketing and selling of units, and handling a larger volume of customers. It thus becomes imperative for them to exercise caution while approaching affordable housing projects under the stricter real estate regulatory environment.