Affordable Housing

Affordable Housing in Chennai

Calibrating the ticket size

� Affordable Housing - Chennai

Executive SummaryChennai’s residential market can be segmented into six different micro-markets—premium, central, off-central and the northern, southern and western suburbs.

According to the 2001 findings of the Census of India, the overall population of Chennai Metropolitan Area (CMA) grew by 1.93% per annum between 1991 and �001. The population, which is currently at about 7 million, is likely to touch 1�.5 million by �0�6.

The percentage of the working population in Chennai was about 35% as per the census in �001. We estimate this percentage to have increased to more than 40% in recent times, with the number of migrant working population in Chennai on the rise.

Most of the housing demand arose from workers in the services industry such as IT/ITES. Close to 48% of the total non-working population in Chennai falls under the age bracket of 15–59. We foresee a large proportion of this non-working population to graduate and commence working. This will lead to an increase in the number of double income no kids (DINK) families in Chennai and will result in a rise in housing demand over the same period.

India’s Rising Disposable Income at CAGR of 17% gets dwarfed when compared to a whopping rise in residential capital values at 40% CAGR in Chennai in the period �005 to �008.

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A sharp rise in property prices in Chennai has led to a steep decline in affordability.

Today, the affordability quotient of end-users in the annual salary bracket of INR 3–8 lakhs is in the range of INR 1,700–�,600 per sq ft.

Pragmatic approaches such as the reduction in unit sizes, investment on amenities like libraries instead of club houses and schools instead of swimming pools and focus on maximising efficiency of the carpet area to the built-up area will help optimise project costs.

Reserve Bank of India’s (RBI) move to give ’priority sector status’ to home loans less than INR �0 lakhs will help drive demand for homes in Chennai.

Government initiatives such as speedy project approvals can reduce project costs and maximise internal rate of returns (IRRs).

Cross subsidies in the form of optimal floor space index (FSI) provision or transfer of development rights (TDRs) will act as growth pills for the affordable housing sector

Value engineering (VE) with optimal construction cost and enhanced quality will make homes technologically affordable.

All three stakeholders—developers, regulatory authorities and the government—must come together and develop a common agenda to make the dream of owning an affordable home a reality.

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Affordable Housing - Chennai 3

The Chennai residential market during 3Q08 witnessed the approval of the second master plan for Chennai Metropolitan Area (CMA) by the Tamil Nadu government. With a focus on Vision �0�6, the Chennai Metropolitan Development Authority (CMDA) has devised a strategy around the second master plan to develop the metro as a more liveable, economically vibrant and environmentally sustainable place. Key salient features of the plan that have direct impacts on the residential sector include the following:

Allowing a 0.25 additional floor space index (FSI) to private promoters developing housing projects for low-income groups (LIG) and economically weaker sections (EWS) by providing for 10% reservation of land where the site exceeds 1 ha.

The above-mentioned provision also includes the development of LIG/EWS housing with flat size not exceeding 484 sq ft (45 sqm) each, either within the site or on a separate site within a radius of � km.

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IntroductionOver the years, Chennai City has geographically expanded, and developers have contributed to the growth of the city to a large extent. The residential landscape that was restricted to the Chennai metropolitan limits underwent a rapid expansion phase and now includes suburban areas towards the periphery of the city. The city map in Table 1 details Chennai’s residential market landscape along with its micro-market definitions.

Chennai’s residential market can be segmented into six different micro-markets - premium, central, off-central and the northern, southern and western suburbs. All these residential micro-markets have witnessed tremendous demand and growth in the past three years. Since �005, each of these micro-markets has more than doubled in terms of capital values.

Source: Real Estate Intelligence Service, Jones Lang LaSalle Meghraj Research

Table 1: Chennai Residential Market Segmentation – Key Locations by Micro-MarketPremium Boat Club, Poes Garden, Chetpet, NungambakkamCentral Abhiramapuram, Adyar, Alwarpet, Anna Nagar, Besant Nagar, Egmore, Kilpauk, Kotturpuram,

Mandaveli, MRC Nagar, Mylapore, Nandanam, Poonamallee High Road, RA Puram, Santhome, Shenoy nagar, T Nagar,

Off-Central Kodambakkam, Thiruvanmiyur, West Mambalam, KK Nagar, Velachery, Kodambakkam, Rangarajapuram, Ashok Nagar, Vadapalani, Triplicane, Koyembedu, Virugambakkam, Nelson Manickam Road, Purasaivakkam

Southern Suburbs Adambakkam, Chrompet, East Coast Road, GST Road, Jamin Pallavaram, Kelambakkam, Madipakkam, Medavakkam, Nanganallur, Navalur, Neelankarai, Old Mahbalipuram Road (OMR), Oragadam, Pallikaranai, Selaiyur, Sholinganallur, Siruseri, Tambaram, Thiruporur, Thoraipakkam, Urapakkam.

Western Suburbs Ambattur, Avadi, Chennai Bangalore Highway (NH4), Kattupakkam, Kolapakkam, Korattur, Madhuravoyal, Mogappair, Mugalivakkam, Nolambur, Padi, Porur, Ramapuram, Sriperumbudur, Thirumangalam, Valasaravakkam, Vanagaram

Northern Suburbs Ayanavaram, Kolathur, Madhavaram, Perambur, Puzhal, Redhills, Royapuram, Sembium, Thiruvattriyur, Tondiarpet, Villivakkam

4 Affordable Housing - Chennai

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A B C D

NN MAP NOT TO SCALEJones Lang LaSalle Meghraj© Copyright. All rights reserved.No part of the map may be reproduced or copied withoutwritten permission from Jones Lang LaSalle Meghraj.STATIONS

EXISTING ROUTE

COMPLETED BY END 2005

PROPOSED STATIONS

CHENNAI MRTS ROUTE PLAN

Northern Suburbs

Western Suburbs

Off Central

Southern Suburbs

Central

Central

Off Central

Off C

entra

l

Prem

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Premium


Demographic OverviewChennai, the capital of Tamil Nadu that was once only the home of Tamils, has taken a paradigm shift to gain a cosmopolitan outlook through the increasing migrant population over the years. According to the census of India survey in �001, the overall population of CMA has grown by 1.93% per annum between 1991 and �001, and it is likely to touch 1�.5 million by �0�6. Against the overall CMA, Chennai City’s population has grown by 1.�3% per annum between 1991 and �001. The population of the city was estimated to be at 4.3 million during �001 and is likely to touch 5.851 million by �0�6.

The primary growth drivers of Chennai’s residential market have been the IT/ITES and the banking, financial, services and insurance (BFSI) sectors. Chennai’s working population was about 35% of the total population of India as per the census in �001. Recent reports estimate that the total population in Chennai has increased to about 8.3 million as of September �008 from about 7 million in �001. This can be mainly attributed to the rise in migrant population that is attracted by the growth in the services industry. The migrant population can be mainly categorised as working population in the age bracket of �3–45. Thus, we estimate the percentage of working population in Chennai to have increased from 35% as per the census in �001 to more than 40% in recent times. Demand for housing can be attributed to the rise

in the working population of Chennai, especially in the last five to six years.

Figure 1 shows Chennai’s population by age group and worker/non-worker. While 100% of the working population falls under the age bracket of 15–59, close to 48% of the non-working population also falls under the same age bracket. This non-working population comprises students and non-working homemakers, of which a larger proportion makes up the students. Over the next decade, this student population will start working and have families. Therefore, we foresee the demand for homes in Chennai to rise over the next 10–15 years. Also, most of this demand will arise from workers in the services industry such as IT/ITES, where family members will be working. Such a phenomenon is not new to India as the number of double income no kids (DINKS) families is on the rise throughout the country.

Figure 1: Chennai’s Population by age group and worker/non-worker.

3,000,000

�,500,000

�,000,000

1,500,000

1,000,000

500,000

Full Time Workers Part Time Workers Non Workers0

> 60

15 to 59

5 to 14

0 to 4

Source: Census of India, �001

1 Volume I, Vision, Strategies and Action Plans, Second Master Plan for Chennai Metropolitan Area, �0�6, September �008

Age Group


Is Chennai Affordable Today?India’s Rising Disposable Income at a CAGR of 17% was dwarfed when compared with the rising residential capital values in Chennai in 2005–2008.

Over the last five to six years, the disposable income in India has been registering a double-digit growth of about 15% y-o-y. In the last three to four years, it registered a CAGR of about 17%, as shown in Figure �. This surge in India’s disposable income has been primarily driven by the services industry, especially IT/ITES. In this paper, we have assumed that disposable income in Chennai has grown at the same rate as that of India.

However, the growth in disposable income was dwarfed when compared with the rapid growth of capital values in the residential sector in Chennai between �005 and �008, as shown in Figure 3. The disposable income in India has been growing at a CAGR of 17% against a whopping

capital value growth across all micro-markets at a CAGR of 40%. The sustained rise in property prices throughout �005–�008, coupled with rising mortgage interest rates, has made housing unaffordable for the common households.

Figure 3 clearly shows the capital value growth by micro-markets as of 3Q08 and the average CAGR for capital values for the overall market against the CAGR in disposable income in �005–�008. Home buyers in the last three to four years have had to spend a higher proportion of their annual income or savings to purchase their house. Individuals or households aspiring to purchase their residential house saw prices grow by an average CAGR of 40% across all micro-markets in the last three to four years compared with their income level rise of an average CAGR of 17% within the same period. This made houses increasingly unaffordable year after year.

60,000

50,000

40,000

Perso

nal d

ispos

able

incom

e(IN

Rbn)

CAGR 05-08 is 17%

30,000�0,000

10,000

�0030

�004 �005 �006 �007 �008

Figure �: India’s Rising Disposable Income

Source: Census of India, �001

Personal disposable income(INRbn)


After the global financial crisis and the slowdown in the off take of high-end residential projects (greater than INR 50 lakhs), Chennai’s residential market has started witnessing a new buzz phrase called ’affordable housing’. Although the city has started attracting investor class in recent times, traditionally, the Chennai residential market was predominantly driven by end-users. Apart from an individual’s aspiration or need to buy a house, key drivers of demand for housing earlier in the decade included low home-loan interest rates and affordable price per square foot of a housing unit.

The macroeconomic pressure stemming from surging inflation and rising home-loan interest rates in the past few quarters had a negative effect on selected micro-markets at varied levels during 3Q08. Demand for housing in Chennai is believed to be alive, but only within realistic price points. Chennai developers have already started evaluating the viability of developing affordable housing projects.

What is Affordable in Chennai?Land prices, government subsidies, construction costs and improved efficacies such as approvals can impact the base price per square foot of a housing unit. A developer’s margin is another component that is added to the base price to arrive at the selling price of a dwelling unit. Each of these parameters is in direct correlation with the affordability of a house. The land prices constitute close to 50% to 60% of the selling price of an apartment depending on the location of the

project. According to CII, current land prices in the central micro-market of Chennai is in the range of INR 5500 to INR 6600 per sq ft and the those in the suburbs of Chennai is between INR 1000 – INR �100 per sq ft.

Figure 4 shows various factors that impact the base price per square foot of a housing unit.

Affordable Housing – Developer PerspectiveTo understand the concept of affordable housing from a developer’s standpoint, in-depth interviews were conducted with prominent developers. The objective of the study was to understand various construction technologies to minimise construc-tion costs and developers’ expectations in terms of subsidies and incentives from the government and finally, to know about their ongoing affordable housing projects in Chennai, if any.

Figure 4: Factors impacting price of a residential unit

Source: Jones Lang LaSalle Meghraj Research

Affordable Housing in Real(i)ty

Government Subsidies

Improved Efficacies

Land Prices

Effective Construction Tecnologies

Figure 3: Growth in Disposable Income Vs Residential Capital Values in Chennai �005 – �008

Source: Real Estate Intelligence Service, Jones Lang LaSalle Meghraj Research

60.00%

50.00%

40.00%

CAGR

(%)

30.00%

�0.00%

10.00%

0.00% Centr

al

North

ern S

ubur

bs

Wes

tern S

ubur

bs

South

ern S

ubur

bs

Off-C

entra

l

Prem

ium

Average Capital Value Growth between �005 -�008

Disp

osab

le Inc

ome


Affordable Housing – End-User PerspectiveAffordable housing has always been on top of any home buyer’s priority list. In order to delve deep into the mind of customers and identify their aspirations of buying a home, an online survey was conducted by Jones Lang LaSalle Meghraj. With the increasing number of nuclear families and the DINK population against the overall population in Chennai, there has been a paradigm shift in home-buying behaviour in terms of preferences, amenities, locations etc.

A questionnaire was designed to be used as a market research tool to analyse the home-buying scenario in Chennai. The following factors were considered:

Apartment Type (one-BHK / two-BHK / three-BHK or more)

Size of the unit

Location

Amenities

Budget

Salary bracket

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Some of the key findings of the in-depth interviews with the developers in the city include the following: More efficient and quick regulatory approval process to ensure timely commencement and completion of the project. This would reduce developer’s holding cost and in turn improves project Internal Rate of Return (IRR).

Subsidies on service tax, registration charges, stamp duty, and VAT

Provision of additional FSI for building affordable homes

Use of more effective construction technologies by use of pre-cast construction techniques to reduce construction time.

Developers are actively considering reducing the unit sizes to increase affordability

Infrastructure initiatives such as road connectivity, water, electricity by the Government to support housing projects.

Apart from the above inferences, majority of the developers interviewed also offered to curtail their margins by a moderate percentage upon the government’s attention to their proposals.

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Figure 5: End User Preference - Unit Size Vs Salary Bracket

Source: Homebay Residential, Jones Lang LaSalle Meghraj

one-BHK>three-BHK

6�%

37%

33%

�1%13%

4�%

�5%

100%67%

<3 Lakhs 3-5 Lakhs 5-8 Lakhs 8-10 LakhsSalary Bracket (INR)


Based on the survey, it was found that 100% of respondents earning less than INR 3 lakhs per annum preferred only one-BHK apartments. While 6�% of respondents who preferred two-BHK units were found to be earning between INR 3 lakhs and INR 5 lakhs per annum, �5% and 13% of respondents interested in two-BHK were under the annual salary brackets of between INR 5 lakhs and INR 8 lakhs and between INR 8 lakhs and INR 10 lakhs, respectively. Interestingly, 4�% of respondents who prefer three-BHK units were found to be under the salary bracket of INR 8–10 lakhs per annum. This is against the 37% of respondents in the INR 5–8 lakh annual salary bracket and �1% of respondents in the INR 3–5 lakh salary bracket who also aspire for a three-BHK apartment.

Respondents who were earning above INR 5 lakhs were the ones found to be interested in an apartment that is higher than the three BHK category. Out of the respondents who opted for more than three-BHK apartments, 67% were earning between INR 8 lakhs and INR 10 lakhs per annum, while the remaining 33% accounted for respondents in the annual salary bracket of INR 5–8 lakhs.

Some of the other key inferences from the study include the following:

95% of the respondents prefer two-BHK or three-BHK apartments ranging from 800 sq ft to greater than 1,000 sq ft;

85% of the respondents thought that they will be comfortable with a loan amount of INR �0–40

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lakhs at current salary levels;

96% of the respondents were in the salary range of INR 3–10 lakhs, wherein more than 60% of them were in the range of INR 5–10 lakhs.

Chennai Affordability QuotientWe believe that only if affordability returns to Chennai’s residential market will we witness large-scale demand in the property market. We highlighted two different scenarios to recognise how various factors such as salary levels, house prices, home loan rates and unit sizes can impact the affordability quotient in Chennai. Following each scenario is a figure depicting a pictorial view of the affordable housing price band.

We have considered some assumptions for our Affordability Quotient Analysis

Majority of home purchasers in Chennai are IT/ITES employees;

Majority of home purchasers in Chennai will either earn individual annual salary of INR 3–6 lakhs or a combined household salary of INR 8–10 lakhs;

The disposable income available to pay the home loan EMI has been calculated after deducting taxes, basic household expenses and investment of up to INR 100,000 from the monthly salary;

The home-loan interest rate has been assumed at 11.5% for a �0-year loan tenure;

The pictorial representation is for the purchase of two-BHK housing unit only.

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�.

3.

4.

5.


Home Buyers Affordability Quotient Analysis

Case 1: Base Case calculating affordability quotient in today’s scenario Unit Sizes - one-BHK size is 700 sq ft, two-BHK is 1000 sq ft and three-BHK is 1500 sq ft.

Annual Salary Monthly Gross salary

300,000 �5,000

400,000 33,333

500,000 41,667

600,000 50,000

700,000 58,333

800,000 66,667

900,000 75,000

1,000,000 83,333

Monthly Maximum Diposable Income after taxes and basic house-hold expenses*

Max. EMI Affordability

5,750

~5700

9,333

~9300

13,750

~13500

18,000

~17000

�4,500

~�3000

�8,667

~�8000

36,000

~36000

41,667

~41000

Max. Loan eligibility at 11.5% inter-est rate for a �0 year loan planEMI for the loan amount mentioned above

500,000

5,404

850,000

9,187

1,�50,000

13,511

1,500,000

16,�13

�,�10,000

��,698

�,500,000

�7,0��

3,300,000

35,669

3,800,000

41,073

Size of a typical three-BHK

Affordable price of a house per sq ft

1500

333

1500

567

1500

833

1500

1,000

1500

1,400

1500

1,667

1500

�,�00

1500

�,533

Size of a typical two-BHK


1000

500

1000

850

1000

1,�50

1000

1,500

1000

�,100

1000

�,500

1000

3,300

1000

3,800

Size of a typical one-BHK


700

714

700

1,�14

700

1,786

700

�,133

700

3,300

700

3,571

700

4,714

700

5,4�9

* Grocery �4%; Investment19%; Taxes 10-30%; Misc expenses 5-10%. All unit sizes are in sq ft and prices are in INR

End users of salary band INR 3-5 lakhs can afford a one-BHK house up to INR 1,786 per sq ft End users of salary band INR 6-8 lakhs can afford a two-BHK house up to INR �,500 per sq ft End users of salary band INR > 8 lakhs can afford a three-BHK house up to INR �,533 per sq ft

8500

7500

6500

5500

4500

3500

�500

1500

500

Capit

al Va

lue (I

NR pe

r sq f

t)

Micro Markets

Central

Off-Central

Affordable

Avarage Capital Values

The figure below shows that average prices across all micro-markets in Chennai fall outside the affordability price band. Chennai today seems unaffordable.

Source: Real Estate Intelligence Service, Homebay Residential, Jones Lang LaSalle Meghraj

NorthernSuburbs

SouthernSuburbs

WesternSuburbs


Home Buyers Affordability Quotient Analysis

Case �: Calculating the affordability quotient after reducing unit sizesUnit sizes – one-BHK unit is 550 sq ft, two-BHK unit is 850 sq ft and three-BHK unit is 1,150 sq ft.

Annual Salary Monthly Gross salary

300,000 �5,000

400,000 33,333

500,000 41,667

600,000 50,000

700,000 58,333

800,000 66,667

900,000 75,000

1,000,000 83,333

Monthly Maximum Diposable Income after taxes and basic house-hold expenses*

Max. EMI Affordability

5,750

~5700

9,333

~9300

13,750

~13500

18,000

~17000

�4,500

~�3000

�8,667

~�8000

36,000

~36000

41,667

~41000

Max. Loan eligibility at 11.5% inter-est rate for a �0 year loan planEMI for the loan amount mentioned above

500,000

5,404

850,000

9,187

1,�50,000

13,511

1,500,000

16,�13

�,100,000

��,698

�,500,000

�7,0��

3,300,000

35,669

3,800,000

41,073

Size of a typical three-BHK


1150

435

1150

739

1150

1,087

1150

1,304

1150

1,8�6

1150

�,174

1150

�,870

1150

3,304

Size of a typical two-BHK


850

588

850

1,000

850

1,471

850

1,765

850

�,471

850

�,941

850

3,88�

850

4,471

Size of a typical one-BHK


550

909

550

1,545

550

�,�73

550

�,7�7

550

3,818

550

4,545

550

6,000

550

6,909

* Grocery �4%; Investment 19%; Taxes 10-30%; Misc expenses 5-10%. All unit sizes are in sq ft and prices are in INR

End users of salary band INR 3-5 lakhs can afford a one-BHK house up to INR �,�73 per sq ft End users of salary band INR 6-8 lakhs can afford a two-BHK house up to INR �,941 per sq ft End users of salary band INR > 8 lakhs can afford a three-BHK house up to INR 3,304 per sq ft

8500

7500

6500

5500

4500

3500

�500

1500

500

Capit

al Va

lue (I

NR pe

r sq f

t)

Micro Markets

Central

Off-Central

NorthernSuburbs

SouthernSuburbs

WesternSuburbs Affordable

Avarage Capital Values

The figure below shows that average prices across the suburban micro-markets in Chennai fall inside the affordability price band.

Source: Real Estate Intelligence Service, Homebay Residential, Jones Lang LaSalle Meghraj

1� Affordable Housing - Chennai

One Indiabulls Centre, Lower Parel, Mumbai

Home Buyers Affordability Quotient Analysis : Key Inferences

Table 3: Key On-going Projects in Chennai within Affordability Bracket

Project Sreshta Retreat Dugar Homes Hansa Courtyard Metro Nest

Developer Sumanth Constructions Dugar MME Hansa Estates True Value Homes

Location Avadi OMR – Kanagapattu Thiruvottriyur Sriperumbudur

Number of Units 118 500 �68 TBA

Unit Sizes (sq ft) 985, 10�5, 14�5, 1450 489, 683, 777, 9�1, 1000 511 – 1000 565, 665, 885, 1085

Unit Type two-BHK, two-BHK+Study

one-BHK, two-BHK, three-BHK

one-BHK, two-BHK, three-BHK

one-BHK, two-BHK, two-BHK+Study

Rate per sq ft INR �,300 INR �,150 INR �,450 INR �,400

Source: Homebay Residential, Jones Lang LaSalle Meghraj Research

Table � shows that the affordability levels of home buyers between different salary brackets increase upon reduction in unit sizes. Reduction in units sizes leads to an increase in affordability by as low as 17% to as high as 30% (depending on the apartment type) to own a house. With such configurations as mentioned above, even the LIG (Lower Income Group) and EWS (Economically Weaker Section) dwellers get motivated to afford a house. It also encourages people who are in the rented accommodations to come out of their unaffordable mind set to aim at owning homes.

Additionally, based on the end-user survey conducted by Jones Lang LaSalle Meghraj, respondents with a salary of above INR 8 lakhs expressed interest in purchasing a two-BHK house on a better location at a higher price compared with a three-BHK house on an inferior location at a lower price.

Other than the reduction in unit sizes in housing projects as shown in Case �, the increase in income levels in the future and the softening of home-loan interest rates for budget homes will increase the affordability price band and will likely cause a spurt in housing demand.

Few of the developers have been proactive during the current challenging market conditions and have initiated projects that are strategically priced in order to target home buyers within different salary brackets. These projects are affordable because of the fact that they are competitively priced lower than the prevailing average price in their respective micro-markets. Table 3 gives a snapshot of a few affordable projects as of December �008.

Table �: Affordability Quotient

Scenarios Case 1* Case �**

Salary Bracket (INR Lakhs)

Apartment Type Unit Price INR per sq ft

Affordable Budget (INR Lakhs)

Unit Price INR per sq ft

Affordable Budget (INR Lakhs)

3 to 5 one-BHK 1,786 11.6 - 13.4 �,�73 11.3 - 13.6

5 to 8 two-BHK �,500 �3.75 - �6.�5 �,941 �3.5 - �6.5

8 to 10 three-BHK �,533 36.7 - 37.3 3,304 36.3 - 39.6

*one-BHK - 650 sq ft to 750 sq ft; two-BHK - 950 sq ft - 1050 sq ft; three-BHK - 1450 - 1550 sq ft

**one-BHK - 500 sq ft to 600 sq ft; two-BHK - 800 - 900 sq ft; three-BHK - 1100 sq ft - 1�00 sq ft

Source: Real Estate Intelligence Service, Jones Lang LaSalle Meghraj


Mortgage Finance Market DynamicsAs part of this paper, we spoke to two private banks to understand the change in mortgage finance market in the last 9-12 months.

Some of the key findings of the interview with the private banks reveal the following:

The overall loan disbursements in 3Q08 onwards have been substantially lower than the ones in the previous six to eight quarters;

The first two quarters of 2008 were positive and saw an equal number of loan disbursements compared with that in the same time last year;

The percentage of loan disbursements less than INR 30 lakhs and below has increased from about 50% in 1H08 to above 70% in 3Q08.

Recently, the Reserve Bank of India (RBI) announced the ’priority sector status’ for home loans less than INR �0 lakhs, which is subject to a ceiling of 5% of any housing finance company’s total priority sector target. This move of RBI is expected to increase the flow of funds into the housing sector and will also drive the demand from the middle-income group (MIG). Public sector banks are brainstorming to come up with a package for borrowers or home buyers. They are likely to classify home buyers based on their buying capacity (e.g. for loans of up to INR 5 lakhs and between INR 5 lakhs and INR �0 lakhs). This will, to a large extent, motivate home buyers in the LIG as well as in the EWS.

Recommendations

Government Initiatives

Speedy Approvals to Make Housing More Affordable

The government’s efforts to ensure faster approvals of affordable housing developments will help reduce a project’s gestation time and holding costs. This will in turn help control costs, which can escalate due to delays in formal approvals from regulators. Such an initiative will not only make affordable housing an attractive project in terms of viability from a developer’s perspective,

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but also cater to the rising demand for inexpensive housing. The time to get approvals for projects affect the completion time of the project, which is in turn directly linked to project costs and IRRs.

A consortium of government-certified or government-approved architects can be appointed by private developers to ensure timely approvals of project plans. This is similar to certified professional chartered accounts that prepare and advise clients on their income tax returns and issues.

Public Private Partnership – Win-Win Situation

A joint venture or a public-private partnership (PPP) could also be a lucrative option for both the government and developers. Apart from partnerships, initiatives in the form of waivers or subsidies on sales tax, registration and VAT and stamp duty could help bring down the total unit cost by nearly 10–15%. The government could facilitate partnering with public sector banks to provide mortgage products at lower interest rates to the weaker classes.

Such moves will lead to a win-win situation from the perspective of both the government and private players. Developers could leverage this public-private partnership advantage and pass on the benefit to end-users and hence become successful in selling affordable homes in reality.

Provision of Optimal Floor Space Index (FSI) with Requisite Infrastructure Initiatives

To promote affordable housing, the provision of optimal FSI by the regulatory authorities for such projects could help developers in building more homes in the allocated land. Efforts like proper infrastructure developments such as road connectivity, water supply, power etc will encourage customers to migrate to newer and farther locations that are away from the city centre. On the other hand such improved infrastructure would also motivate the developers to come up with affordable projects at far off locations from the city center.


Cross Subsidy Model - Growth Driver to Affordable Housing Sector

From the government’s side, as an initiative to promote affordable housing in Chennai, cross-subsidies could be given to developers to attract them to build affordable housing projects. Cross-subsidies can be in the form of additional FSI or transfer of development rights (TDR), which can be used elsewhere for the development of any other type of project.

The slum rehabilitation programme in Mumbai is a classic case of cross-subsidisation in India. According to this programme, the government will allow private developments on land occupied by slums. In exchange for the land’s development rights, developers are invited for a private-public partnership to provide new housing to existing slum dwellers, while the remainder of the site is made available to developers for them to develop, sell and profit from.

Developer Initiatives

Effective Scheduling and Execution of Project

Developing affordable homes depends a lot on effective planning and scheduling of various project timelines along with a prompt delivery. As the rates of raw materials such as steel, cement and other building materials like tiles and fit-outs continue to fluctuate depending on the demand–supply situation in the commodities market and the overall macroeconomic weather; these can impact the delivery schedule of projects. Therefore, it is highly imperative for developers to ensure adherence of schedule to control costs.

Making Houses Technologically Affordable

The cost structure of the construction industry is dominated by raw material and subcontracting costs. Raw material cost, which is the major cost, accounts for 40–50% of the total cost. Meanwhile, subcontracting cost accounts for about �0–40%. Major raw materials consumed by the construction industry mainly include cement

and steel. The unprecedented rise in the price of these two raw materials during 1H08 has a direct impact on the cost of projects and in turn on the margins of construction companies. Incorporating the best practices across the globe to minimise construction costs will facilitate developers to offer more lucrative housing deals to end-users. Some of the commonly used best practices include the use of pre-fabricated structures to build high-rise buildings, optimal flooring using ceramic tiles instead of glossy vitrified tiles, cellular light weight concrete (CLC) etc.

Value Engineering to Ensure Optimal Cost with Enhanced Quality

The objective of value engineering (VE), apart from reducing cost is also to enhance the design, operations and maintenance. VE is carried out during all stages in a project, especially during the design, procurement and construction stages. VE can be achieved by practicing the following:

effective usage of locally available materials including marginal and industrial waste for the reduction of cost, yet maintaining the functional requirements of end-users;

rainwater harvesting, low-cost sanitation, waste-water management, and landscaping with recycled water

solar-operated street lights;

main electrical equipment to be located together, which helps in further cost reduction;

trenches for electrical, data etc and cabling to take the shortest route possible;

passive cooling, providing adequate natural ventilation systems to avoid forced ventilation/pressurisation systems;

avoiding lifts and fire protection systems by keeping the lesser height of the buildings;

cement concrete pavement roads are at par with the conventional pavement; they are lower than the conventional flexible pavement if maintenance cost is also considered and whose bitumen top is to be renewed every five years.

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Hariharan GanesanSenior Analyst, Research & REISJones Lang LaSalle [email protected] +91 44 4�993061Hariharan Ganesan joined the Jones Lang LaSalle Meghraj Research team in April �008 and is responsible for the Indian Real Estate Intelligence Service (REIS) publications. Based in Chennai, he contributes to research deliverables on industrial, commercial, retail and residential real estate markets in the country. Prior to joining the Firm, Hariharan worked on research in different fields for two years in India. He holds a dual degree from Bits Pilani and an MBA from IIPM, Delhi.

Abhishek Kiran GuptaAssociate Director, Research & [email protected] +91 �� 66581000Abhishek Kiran Gupta leads the Jones Lang LaSalle Meghraj India Research team and is based in Mumbai. He manages research operations on a Pan-India level and is responsible for the team’s outputs, including research reports such as topical white papers, property market digests and bespoke research projects based on specific client requirements. Prior to joining Jones Lang LaSalle, he had seven years of experience in market research, business analysis and market strategy consulting, servicing diversified industries including pharmaceutical, software publishing and insurance.

Authors

Prudent Positioning

Keeping in mind the ’real’ demand for housing from varied income levels of end-users, develop-ers can adopt a need-based pragmatic approach to minimise the gap between the aspiration of home buyers and the current market offerings. Developers could build affordable homes by ensuring smaller unit sizes, investing on amenities like libraries instead of club houses and schools instead of swimming pools, which will lead to much easier maintenance. Developers can also focus on maximising efficiencies of the carpet area to the built-up area to offer cost-effective housing in reality.

Congruence – an Affordable Consensus

Is Chennai all set for the historical congruence of developers, regulatory authorities, government and home buyers? The answer to this question is ‘Yes’! Having identified the affordability bracket for home buying in Chennai for home buyers with an income range of INR 3–10 lakhs per annum, it is time for authorities and developers to streamline their offerings to arrive at an affordable consensus. Chennai government, regulatory authorities and developers must come together to reach a com-mon agenda to make affordable housing in Chen-nai to become a reality and facilitate end-users to own their dream home at an affordable cost.

COPYRIGHT © JONES LANG LASALLE MEGHRAJ �008 All rights reserved. No part of this publication may be published without prior written permission from Jones Lang LaSalle Meghraj. The information in this publication should be regarded solely as a general guide. Whilst care has been taken in its preparation no representation is made or responsibility accepted for the accuracy of the whole or any part. We stress that forecasting is a problematical exercise which at best should be regarded as an indicative assessment of possibilities rather than absolute certainties. The process of making forward projections involves assumptions regarding numerous variables which are acutely sensitive to changing conditions, variations in any one of which may significantly affect the outcome, and we draw your attention to this factor.

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Acknowledgements We would like to acknowledge the contributions of our Homebay Residential team based in Chennai for sharing their knowledge and expertise.

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Real Estate Intelligence Service India

REIS India is a subscription based research service designed to provide you with cutting edge insights into India’s diverse and challenging real estate markets through collation, analysis and future forecasts of property market indicators and trends across all major Indian markets across variosus real estate asset classes - office, retail, residential.REIS empowers you with consistent and complete market data and analyses for all real estate indicators by specific micro markets. It is supplemented by value added services including client briefings, presentations and rapid market updates. For more details, contact Ananthanarayanan at [email protected] or +9198840 �1335

REIS India

Affordable Housing

Documents

Transcript of Affordable Housing