Developers are curtailing affordable housing projects amid weak margins

In a developing country like India, affordability remains a significant factor in making purchases, especially for long-term investments such as a home. However, data from several real estate consultancies suggests that while the demand for affordable or budget housing (costing up to Rs 40 lakh to Rs 50 lakh) remains high, sales in this segment have declined, particularly since the pandemic.
 

According to data shared by Anarock, the previously robust affordable homes category has seen a decline in overall sales in the top seven cities, dropping from about 38 per cent before the pandemic to 19 per cent in 2023.
 

Anuj Puri, chairman, Anarock Group, explains that the Covid-19 pandemic negatively affected the target audience of this segment, which in turn impacted affordable housing sales. “Moreover, several incentives offered to developers and consumers in this market over the years have expired in the last one to two years,” he says.
 

As a result of this, developers have also curtailed new supply in this segment. 
 

According to PropEquity, new launches in the affordable housing segment have fallen over the last two years in both Tier-I and Tier-II cities. The year-on-year (Y-o-Y) drop in tier 1 cities was 14 per cent in 2023, and it is expected to fall further to 28 per cent in 2024. In Tier-II cities, affordable housing unit launches saw a drop of 26 per cent in 2023, and this year, a 27 per cent decline is anticipated.
 

Samir Jasuja, CEO and managing director, PropEquity India, says that real estate prices in almost every city have increased by 50 to 100 per cent in the last two years, driving up construction costs. 
 

“This has made the affordable segment less lucrative for developers. Another reason is that post-pandemic, we are witnessing a rise in demand for larger homes, increasing the overall ticket size of every property to much higher price points,” he adds.
 

Puri notes that since buyers in the affordable segment are in a wait-and-watch mode and profit margins in the segment are low, developers have shifted their focus to the premium and luxury segments, which are performing significantly better. 
 

Jasuja concurs that since the mid and luxury segments are booming, private developers are focusing more on them due to higher profit margins and increased demand.
 

However, Kanika Gupta, co-founder and chief operating officer of proptech platform Square Yards, maintains that demand for affordable housing remains undiminished. Overall demand for housing, she says, is estimated to reach about 100 million by the next decade, with affordable housing accounting for a significant 54 to 60 per cent, fuelled by rapid urbanisation and greater rural-to-urban migration. 
 

“Bridging this demand-supply gap is crucial for meeting the housing requirements of the populace and fostering sustainable growth in the country,” she adds.
 

Jasuja is of the view that while government schemes like the Pradhan Mantri Awas Yojana (PMAY) are helping to meet demand in villages and Tier-III and IV cities, the same cannot be said for Tier-I and II cities.
 

Looking ahead to 2024-25 (FY25), Puri says that as things stand now, the affordable housing segment may continue to perform poorly unless the government rolls out incentives for both buyers and developers. 
 

“The government can offer some tax benefits, such as increasing Section 24 of the Income Tax Act’s Rs 2 lakh tax rebate on home loan interest rates to at least Rs 5 lakh to boost demand and attract more buyers,” he says.
 

He also suggests that the government could modify the qualifying standards for affordable housing to make more buyers eligible for additional deductions, including goods and services tax (GST). 
 

“Given that its demand still holds, there is a need for the government to encourage developers to construct more affordable housing and to make it possible for people to acquire such homes,” he adds.
 

For now, though, affordable isn’t a catchword that is attracting developers.