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A Cushman & Wakefield Research Publication

HOUSING:

THE GAME CHANGERLEADING TO DOUBLE-DIGIT GDP GROWTH

JANUARY 2014

Contents

Executive Summary 1

Housing and the Indian Economy 2

– Impact on GDP 2

– Impact on Employment 4

– Impact on Foreign Direct Investment (FDI) 4

– Impact on Banking & Finance 4

– Multiplier effect on other Sectors 6

Housing and its Role as an Asset 7

Housing and its Impact on Urbanisation and Poverty 8

– Impact on Labour Markets 9

Housing Sector Problems and Solutions 10

– Tedious and Prolonged Regulatory Processes 10

– Land Related Problems 10

– Funding Problems 11

– Manpower & Technology Problems 12

– Additional Solutions/ reforms 12

Conclusion 14

HOUSING:

THE GAME CHANGER

1

amongst 14 major industries in terms of total linkage effect in the

economy, it may not be incorrect to say that the growth of the

housing sector will act as a catalyst to the overall economic

growth, and can lead to a double digit GDP growth.

The Central and State Governments are adopting several

measures to reduce constraints and provide adequate support to

the sector. There have been recent reforms, policies and initiatives

like allowance of FDI, benefits under section 80, rebates on

housing loans, lower interest rates, etc. Additionally, Public

Private Partnership (PPP) models have been introduced for large

scale developments and to attract interest from private equity

and venture capitalists. However, these initiatives by the

Government have not been adequate and there still are

challenges faced by the sector, which is evident by the increasing

housing shortage over the years. Challenges such as the

cumbersome regulatory processes, which causing delays and

inefficiencies in supply, inadequacies in infrastructure, insufficient

and limited avenues for funding, manpower shortages and

technology advancement faced by the housing sector are

adversely impacting both developers and buyers. The need of the

hour is to recognize these challenges and take measures to

mitigate them.

This report presents an analysis of the impact that the housing

sector in India has on various aspects of the economy and the

multiplier effect the sector has on it. It also provides a detailed

analysis of the role and participation of various stakeholders and

the steps needed to boost the growth of the sector, whilst also

sharing case studies from other countries to highlight the

importance and impact of the growth of the housing sector.

EXECUTIVE SUMMARY

The right to an adequate standard of living is a basic right of an

individual and is not only integral to the social-cultural well-being

of a nation, but also vital for the economic health. The progress of

the housing sector does not only have direct, but indirect as well

as induced effects on the country's economic growth as various

global studies have shown that a well developed housing sector

has a high and positive correlation to a country's economic

growth. An increasing population and urbanisation coupled with

the current housing shortage of 62.45 million (mn) units in India

is creating a huge stress on the economy as an estimated 65.5 mn

people currently reside in slums, which hampers their social and

economic health. Consequently, whilst many other countries have

a correlation of housing to GDP that exceeds 0.90, in India the

correlation is expected to be around 0.78; though it has also

been estimated that the sector has forward and backward

linkages to over 300 ancillary industries.

The demand for housing units is expected to increase by another

26.33 mn units by 2017 due to population growth alone, if the

current rate of growth is maintained. It has also been estimated

that the sector needs an estimated investment of INR 106.54

trillion (tn) at today's values to meet the housing shortage by

2017. Neither the Government nor the private sector alone

cannot tackle this large problem without working together and

creating a conducive environment. The housing sector needs large

volumes of funding, infrastructure development, supportive

regulatory and policy mechanisms and focussed efforts by both

the government and the private sector to achieve its social and

economic objectives. Given that the housing sector ranks third

2


HOUSING AND THE INDIAN

ECONOMY

The housing sector is closely linked with the economy and the

overall social health of the population of a country. Housing is

one of the basic needs of mankind in addition to being one of the

key growth drivers of the economy. Apart from its contribution

to GDP, construction of housing increases the civil welfare of a

society by improving the social capital of a nation. Rapid

urbanization alone cannot provide a holistic environment to a

country's population if the housing sector fails to grow in an

organized manner putting a greater stress on housing formats like

housing co-operatives, self sustainable communities, eco-villages

and community living. With urbanization at its core, organized

housing is a means through which balanced regional development

can be achieved as it has a substantial impact on other

parameters like employment, standard of living, education and

political scenario in the country.

The pace and degree of urbanization cannot be predicted;

however, urban planning and housing in rapidly growing urban

areas is a major game changer, mainly for developing countries

like India. Planned communities or towns like Hong Kong, Tokyo

and Singapore are some examples of economies where

industrialization was balanced with urban development measures

that transformed the landscape, created more job opportunities

and led to economic growth. In the case of Hong Kong, a city

with land shortage, the provision of housing for resident through

the development of skyscrapers has increased its economic

capital due to improvements in living conditions and the growth

in facilities required for community living like shopping centres,

malls, schools, hospitals, etc.

Real estate investments have been one of the important growth

drivers in economic growth; a number of academic and business

studies have established the correlation very strongly. Some of

the studies have empirically proven the short term and long term

effect of consistent housing investments on any country's GDP

growth. Housing construction investments, which comprise the

bulk of all real estate activity, contributes directly to an economy

as can be seen in the table below. Moreover, though personal

consumption expenditure by individual and households

contributes substantially to the economy, it contains a sizeable

mix of expenses incurred on rent, utilities, related taxes, etc, all of

which are also contributions of the housing sector to the GDP

of an economy. According to the Economic Survey of India,

2012-13, the real estate sector contributed 5.9% of the India's

total GDP in 2011-12, registering a growth of 7.2% from the

previous year. Though this share is currently amongst the highest

as can be seen from the table below, considering the current

state of the infrastructure and shortage of real estate assets vis-

a-vis the population in India, it is still grossly inadequate as,

besides contributing substantially to the GDP, the sector needs

to increase its real estate production and investment immensely

to compare to those in countries such as Brazil and China.

It is important to note that though population levels of China

and India are not too different, the variation in per capita real

estate production is more than 3.5 times. The per capita real

estate production in China is approximately USD 5,418 whereas

it is USD 1,486 in India.

IMPACT ON GDP

Source: Cushman & Wakefield Research, World Bank

REAL ESTATE SECTOR PRODUCTION & CONTRIBUTION TO GDP (2011 - 2012)

Brazil China Colombia India Indonesia Japan Malaysia Mexico Philippines Thailand U.S.A.

Real Estate Production Real Estate as % of GDP

USD

B

illio

ns

0

2

4

6

8

10

12

14

16

18

0

500

1,000

1,500

2,000

2,500

Perc

enta

ge o

f G

DP (

%)

Hong Kong

January 2014

HOUSING:

THE GAME CHANGER

3

High Correlation of GDP and Real Estate Activities

Statistics over the last five years depict high correlation of GDP

and real estate activity. For most countries, the correlation is over

0.9 stressing on the importance of the sector in the economic

growth. Housing being the key segment in real estate sector, it

becomes imperative for the Governments to focus on and adopt

policy measures that accelerate housing development in turn

boosting economic activity through direct and indirect means.

China, with a very high correlation of 0.98 has seen consistent

increase in real estate investments in last five years with a CAGR

of 13%, which is around 6% of the GDP each year. On the other

hand, in the U.K. where real estate investments is only 1% of the

GDP, the correlation is also as high as 0.91. For India, the

correlation is difficult to calculate since Real Estate production

has been historically clubbed with other sectors and its individual

total production/investment numbers are difficult to ascertain.

However, one can reasonably assume that the correlation would

be at least as high as 0.78.

Case Studies

a) China

Government policies have played a major role in aiding housing

developments in China. One of reasons for unusual growth rate

achieved by the Chinese economy in view of weak economic

growth across the world is the aggregate investments aided by

Government policies. Among other investments, increase in

housing investments owing to the housing reform policy reform

in 1998 resulted in huge demand for housing and encouraged to

real estate developers to construct more units. Additionally, the

Government encouraged housing construction by improving the

approvals and regulatory processes and providing easy credit for

housing development projects. It is estimated that the real estate

investment in 2012 accounted for 12.5% of China's GDP and 14%

of total urban employment. However, real estate business in India

accounted for only 5.9% of the GDP and 5.5% of the total urban

employment in 2012.

b) United States of America (U.S.A.)

The housing policy in the U.S.A. has brought about significant

changes in the economy by focussed efforts of the Government.

The tax code has been the most important policy tool for the

housing sector, which subsidizes imputed rents and allows

deductions for mortgage interest payments. The Government

also offers a variety of programs in public policy to support

home purchase wherein certain class of individuals can borrow

below the market rates. In addition, there are a number of

federal and state programs that assist low-income households to

own a home. It is estimated that housing construction

investments and housing services contribute 15.5% of the real

GDP in the U.S.A., more than 2.6 times India's contribution, even

when it is a developed country where housing needs are

CORRELATION OF GDP TO REAL ESTATE

Source: Cushman & Wakefield Research

0 0.2 0.4 0.6 0.8 1.0

U.S.A.

Germany

Spain

U.K.

China

CHINA - REAL ESTATE INVESTMENT (IN PERCENT OF GDP)

Source: IMF

0%

4%

8%

12%

16%

1996 1998 2000 2002 2004 2006 2008 2010 2012

Inve

stm

ent

in p

erc

ent

of G

DP

Year

Real Estate Investment Residential Real Estate Investment

U.S RESIDENTIAL FIXED INVESTMENT

Source: Valadez, R.M. (2010) adapted from data retrieved from BEA

0%

1%

2%

3%

4%

5%

6%

7%

8%

1 3 5 7 9 11 13 15 17 19

Perc

enta

ge o

f G

DP

Quarters from 2005-2009

% of Real GDP Expon. (% of Real GDP)

(AS A PERCENTAGE OF GDP)

4


INR

Bill

ion

FDI IN CONSTRUCTION DEVELOPMENT

Source: Department of Industrial Policy & Promotion, Government of India

11% 12%

7%

1%

6%

4%

0

20

40

60

80

100

120

140

160

180

0%

2%

4%

6%

8%

10%

12%

14%

2008 2009 2010 2011 2012 H1 2013

FDI in Construction Development % Contribution to total FDI

which mainly affected real estate markets globally, FDI

commitments to the sector were low. Hence, since 2010

onwards the sector has been attracting lesser FDI equity with its

share falling to as low as 1% in 2011 and increasing up to only 6%

in 2012. In the past few years, FDI investors were stuck in

complicated approval processes, which made the time lines of

projects they invested in uncertain and their financial planning

estimates went wrong. Apart from cost overruns due to

inflationary pressure on materials etc, the investors are worried

about their timelines for exit which has been elongated and

adversely affected their returns on investments. Hence, the lack

of certainty with regards to the time lines in the country risk

compounded by the bureaucratic hurdles and corruption is

further shaking the confidence of the investors. Given that the

first six months of the current financial year have recorded FDI

equity inflows into the sector at INR 41.6 bn (USD 685 mn),

there are indications that the rest of the year could record FDI

equity inflows at par with the figures observed last year. Hence,

the Government needs to take some concrete steps to create

international investor interest in order to attract more foreign

equity capital into the country and cross the previous thresholds.

There is a pressing need for the Government to act quickly on

the proposal by the MHUPA to encourage FDI in to the sector

by:

• easing the 3 year lock-in period,

• reducing the minimum capitalization threshold from USD

10/5 mn to USD 1 mn,

• reducing the minimum built-up area of 500,000 sf to

100,000 sf of carpet area,

• removing criterion of the minimum plot areas

The growth of India's middle class population, lowering of

interest rates coupled with greater access to mortgage funding

and increase in disposable income have propelled greater

investment in residential real estate at the individual level. Apart

from the sentimental value attached to a house in India, over the

years it has also acted as an asset class giving good returns over

the years. However, unlike many other countries, though

mortgages as a percentage of GDP have risen from 3.4% in 2001

to 9% in 2011- 12, a large portion of the population does not

have access to formal credit and also most houses in India are

bought through savings rather than through mortgages, which is

why India has one of the lowest mortgage to GDP ratio globally.

The total housing credit outstanding in India stood at INR 7.59 3

billion by the end of March 2013 . The RBI categorizes housing

amongst the six priority sectors and has mandated that 40% of a

bank's disbursals need to cater to it. Despite most banks in India

IMPACT ON BANKING & FINANCE

substantially satisfied. Hence, it is safe to assume that for a

housing deficit nation like India, the GDP contribution from

housing should be multifold. If we need to satisfy the deficit in

housing it will take investment of INR 22,200 billion, which is

nearly 12 times the current GDP contribution of the sector.

(Note: The volume of investment in housing includes investment

in infrastructure for the development of housing.)

The housing and construction sector is the second largest 1

employment generator after agriculture in India ; employment in

real estate sector is estimated to have a 20-30% share in this. The

employment levels in the construction sector increased from

17.54 million (mn) in 1999-2000 to 52.16 million by 2009-10 as

per the Planning Commission estimates. As per recent estimates

by CREDAI, the real estate sector employment across India in

2013 was estimated to be nearly 7.6 million people. Given the

total existing demand for real estate in the country, the number

of real estate sector employees could go up to about 17 million

by 2025.

According to the Department of Industrial Policy & Promotion 2

(DIPP), the Construction Development sector received a total

Foreign Direct Investment (FDI) equity inflow of INR 1,052 bn

(USD 22.8 bn) during April 2000 to September 2013. This amount

to an 11.1% share of the total FDI equity inflow and is the second

highest amongst all sectors, outlining the importance of the

sector in attracting valuable foreign capital to the country. From

2005, the DIPP allowed 100% FDI through automatic route in

townships, housing and built-up infrastructure and construction

developments, which drove up the FDI inflows in FY2008 and

FY2009. However, post the global economic recession in 2008,

IMPACT ON EMPLOYMENT

IMPACT ON FOREIGN DIRECT INVESTMENT (FDI)

1 Economic Survey of India, 2012-13

2 Defined as Townships, housing, built-up infrastructure and construction-development

projects by DIPP3 Indian Mortgage Finance Market Report Updated for Q1, 2013-14, ICRA

January 2014

HOUSING:

THE GAME CHANGER

5

reporting double digit growth in mortgage lending since the past

few years, the ratio of outstanding mortgage debt to total

outstanding debts at the end of Financial Year 2012-2013 stood at 4

9.2% , indicating the good quality of lending to the sector, unlike

the sub-prime loans witnessed in the U.S.A., which resulted in the

global financial meltdown of 2008. However, despite the priority

sector tag, lending to the lower most segments of the society

availing loans of up to INR 5 lakhs constituted just 22.75% of the

total lending to housing sector in 2010 as per data from public

sector banks.

Based on the RBI's data, it can be estimated that the bank credit

deployment to construction sector In India has been very meagre

at 2.3% of the total industry credit deployment during 2012-13

and has been in the range of 2.5-3.5% in the last five years. The

loan outstanding in the real estate sector is also lower compared

to other countries that have recorded real estate loans

outstanding as high as 30%.

The real estate market in India faces liquidity issues due to the

cyclical nature of the sector and erratic supply. Restructuring of

loans over longer time periods requested by developers

(currently the stipulation for recognising Non-Performing Assets

in the case of loans to the sector is 90 days) has not been

permitted despite high provisioning requirements and secured

funding through collaterals for the sector. This is unjust to the

sector and should be revised along with allowing roll-overs in the

wake of weakening demand and rising input costs that have

adversely affected the financial health of housing developers.

The housing sector not only has a direct contribution to the

GDP, but it also has a positive impact on the other sectors in the

economy. As per LIC Housing Finance Limited (LICHFL), 78% of

the sum spent on construction of a housing unit in India gets

added back directly to the India's GDP. This impact is thus seen

on all the building material suppliers, like cement, steel sand,

timber to name a few, architectural and interior designer

spending, landscaping and even financing institutions. According

to the National Housing Bank, in terms of total linkage effect in

the economy, the housing sector ranks fourth in the total

economy and third amongst 14 major industries. Further,

considering both forward and backward linkages, over 300 other

ancillary industries are linked to the housing construction sector,

thus drawing in investments and creating jobs at several levels in

these industries as well.

Importantly, the past experience of reforms (1998-1999) in

taxation showed that investments in the development of housing

MULTIPLIER EFFECT ON OTHER SECTORS

TOTAL MORTGAGE TO GDP RATIO

Source: National Housing Bank, India, 2012

2%9%

17%20%

26%29% 32%

41%

81%88%

Indonesi

a

India

Thai

land

Chin

a

South

Kore

a

Mal

ayas

ia

Sin

gapore

Hong

Kong

U.S

.A.

U.K

.

GROWTH IN BANK LOANS TO THE HOUSING SECTOR

Source: Cushman & Wakefield Research, Reserve Bank of India

-10%

0%

10%

20%

30%

40%

50%

2007-08 2008-09 2009-10 2010-11 2011-12 2012-13

Commercial Real Estate

Housing (Including Priority Sector Housing)

Non-food Credit

LOAN OUTSTANDING (2012-13) IN REAL ESTATE SECTOR


0%

5%

10%

15%

20%

25%

30%

35%

Japan China Singapore India

Perc

ent

of

Tota

l Loan

Outs

tandin

g

4 Report on Trend and Progress of Banking in India 2012-13, RBI

6


(such as exemption of Income Tax under section 80 IA and 80 IB)

can also create a multiplier effect on the economy, including an

increase in tax revenues for the Government and employment in

general. For instance, certain exemptions under Income Tax Act

and the introduction of a National Housing Policy whereby the

Stamp Duties across States were rationalized resulted in

increased construction activity and generated employment

contributing to the economic growth. For example, there was a

huge increase in IT-ITeS commercial building supply, which could

sustain the remarkable growth and evolution of the IT-ITeS

industry in the country catapulting it to the foremost outsourcing

destination in the world.

As per the respective countries' government agencies, in the

U.S.A the housing multiplier effect, considering direct, indirect

and induced effects, ranges from 1.3 to 1.6, in Ireland it ranges

from1.4 to1.7; in Australia construction sector multiplier is

around 2.9. Apart from the multiplier effect of the housing sector,

the non-monetary impacts like social and environmental benefits,

health and hygiene benefits and eradication of homelessness have

significant multiplier effect in improving the quality of living.

MANUFACTURING SECTOR

Cements, bricks, glass, wood, tiles, electricals,

machinery, fixtures and fittings, etc

SERVICES SECTORskilled labour for

construction, design, engineering,

banking and finance, sales and marketing,

etc

PRIMARY SECTORRaw materials - sand,

iron, wood, stones, etc

HOUSING SECTORBoosts investments,

employment, infrastructure development,

MULTIPLIER EFFECT OF HOUSING SECTOR

January 2014

HOUSING:

THE GAME CHANGER

7

capital, they have had to turn to Private Equity (PE) Investors and

Financial Institutions for funding. Within the real estate sector,

housing as an asset class has always enjoyed highest contribution

compared to other assets classes due to higher returns and

easier exit options and has contributed to more than 40% of the

total yearly PE investments across asset classes for the past five

years. The housing sector has witnessed a total investment of

INR 22.4 bn in the first three quarters of 2013 as compared to

INR 25.1 bn investment during the same period last year.

However total PE investments have increased from INR 37.5 bn

last year to INR 47.2 bn in 2013 for the same period indicating

greater.

Further, India is rate at one of the lowest destinations for 5

attracting cross border investments in real estate globally; in fact

it is the lowest even amongst the BRIC countries. Other Asian

countries markets such as China, Singapore, Hong Kong, Malaysia,

etc. attract much more cross border real estate investments as

can be seen from the adjoining table.

HOUSING AND ITS ROLE AS AN

INVESTMENT ASSET

As a capital intensive sector, the construction of real estate

projects is also considered a risky proposition by the RBI and

hence, the sector has been placed on the negative list for

business funding. Consequently, besides being charged a higher

rate of interest, the RBI has also discouraged banks from actively

lending to developers. Given the current economic conditions

where developers are faced with headwinds of subdued sales,

increasing input costs and restricted and expensive access to

CROSS BORDER INVESTMENTS

DESTINATIONS TOTAL VOLUME (MILLIONS IN USD)

China 127,158

United Kingdom 116,030

USA 95,587

Germany 63,522

Australia 29,836

Japan 22,184

Singapore 14,158

Russia 9,591

Hong Kong 9,317

South Korea 6,374

Singapore 6,300

Brazil 5,698

Malaysia 4,411

India 2,533

Source: Real Capital Analytics, Cushman & Wakefield Research

Note: Cross border investments in real estate in the last 48 months

INR

Bill

ion

PE INVESTMENTS IN RESIDENTIAL SECTOR

Source: Real Capital Analytics (RCA), Cushman & Wakefield Research

0

5

10

15

20

25

30

2009 2010 2011 2012 2013

(Till Q3)

8


HOUSING AND ITS IMPACT ON

URBANISATION AND POVERTY

The extent of urbanisation in India is much lower than other

developing countries; with only over 31% of the population

residing in urban areas. As per the latest Census data for 2011,

the urban population in India was over 377 mn or 31.1% of the

total population residing in 475 urban agglomerations. The

inability of Indian society to keep pace with the increase in

population has resulted in an under-supply of housing units, which

in 2012 was estimated by the Ministry of Housing and Urban

Poverty Alleviation (MHUPA) at 18.78 mn units of which nearly

95% affects the economically weaker sections (EWS) and low

income group (LIG) of the urban population. Cushman and

Wakefield Research has projected that demand for urban housing

will scale up by nearly 12 mn units by 2017 based on the growth

in population alone. Around 23% of this total demand will be 6

generated by the top eight cities of India. By 2021, the urban

population is expected to increase to nearly 500 mn, about 35%

of the total population of India.

The 2011 Census has enumerated that 13.9 mn households with

a total population of nearly 65.5 mn people reside in slums in

Indian cities. Rural migration is considered to be one of the most

important contributors to the growth in the slum population. The

number of people and the percentage of population employed in

agriculture are on a steep downward curve, reducing from 259

mn (almost 57%) in 2004-5 to 243 mn (about 50%) in 2012-13.

Despite the continued large scale migration of the rural poor to

urban areas, the Twelfth Five Year Plan (2012-17), has estimated

Source: Cushman & Wakefield Research, Central Intelligence Agency

URBAN POPULATION (% OF TOTAL POPULATION)

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Brazil China Colombia India Indionesia Japan Malaysia Mexico Philippines Thailand USA

Urb

an P

opula

tion

PROJECTED INDIAN URBAN POPULATION GROWTH

Source: Cushman & Wakefield Research, Office of the Registrar General & Census

Commissioner, India

Urban Population Total Population

27.82%28.90%

30.02%31.15%

32.29%

38.21%

20%

22%

24%

26%

28%

30%

32%

34%

36%

38%

40%

0

500

1,000

1,500

2,000

2,500

2001 2006 2011 2016 2021 2026

Urb

an P

opula

tion Perc

enta

ge

Popula

tion P

roje

ctio

ns

(in

Mill

ion)

Urban Population Percentage

the total housing shortage in rural areas at 43.67 million units.

The slum population in India was projected to be 94.98 mn in 7

2012 and is expected to touch 104.67 mn by 2017. This increase

in population, if not matched with the required increase in

housing units could contribute to the development of further

slums in urban areas, creating a social problem and becoming

detrimental to the overall health of the Indian economy. Hence,

the total housing demand in the country by 2017 could be as high

as 88.78 mn units.

Creating flexible affordable housing with certain percentage

reserved for rental schemes might provide a faster solution for a

slum-free India. In cities such as Mumbai, affordable housing can

be mainly developed through the redevelopment of existing

slums due to the severe paucity of developable land.

6 Ahmedabad, Bengaluru, Chennai, Hyderabad, Kolkata, Mumbai, NCR and Pune

7 Report of the Pronab Sen Committee on Slum Statistics

January 2014

HOUSING:

THE GAME CHANGER

9

However, slum redevelopment projects are highly complex and

time consuming in nature. The issue of ascertaining the rightful

beneficiaries in a slum usually poses as a major problem in India.

Additionally, getting the necessary regulatory approvals in place

and arranging for the requisite funding for affordable housing

projects are the other bottlenecks. With the RBI discouraging

banks from lending to real estate companies, the fund flow for

India's housing sector is minimal. The establishment of a credit

guarantee fund of INR 1,000 crores to provide collateral free

housing loan from banks to urban poor is a small, but

encouraging move. Moreover, allowing External Commercial

Borrowings (ECBs) for affordable housing projects will also help

to provide cheaper funds. However, currency devaluations could

offset any gains derived from accessing cheap international

funding.

It is important to note that in developed countries, public sector

construction funding through risk free rates is used for social

housing. In Scandinavian countries, Netherlands and France

additional guarantees were provided for bringing down the rates

further. On one hand reserves from rents and subsidies are used

as equity to develop social housing by many social sector

agencies. On the other hand, in Germany even private equity

investment companies and REITs have invested in the social

rented housing through large scale municipal sales. Similar models

need to be introduced in India for large scale investments to take

place in providing the necessary infrastructure, technologies and

expertise to develop the necessary affordable houses on a mass

scale in a time bound manner.

The number of urban agglomerations has increased from 384 in

2001 to 475 in 2011, a decadal increase of 23.7%. This is largely

the result of development of new urban areas to ensure that

existing urban areas are decongested and to manage the rural –

urban migration. Consequently we have seen the development of

new townships and Special Economic Zones that provide

employment opportunities in industrial and manufacturing

sectors as well as in IT-ITeS and related activities. These projects

are closely correlated to growth of the housing sector as they

provide mass employment and attract labour from across the

IMPACT ON LABOUR MARKETS

ESTIMATED INDIAN HOUSING DEMAND FOR 2017

DEMAND FOR HOUSING UNITS IN MN.

Urban shortage in 2012 18.78

Rural shortage in 2012 43.67

Additional demand due to population growth in 2012-2017 26.33

Total demand 88.78

Source: MHUPA, National Housing Bank, Cushman & Wakefield Research

country. The ability of such projects to provide affordable housing

at these locations can have a huge impact on attracting the

requisite labour to these greenfield sites and ensure that the

projects meet with success.

Projects such as the Delhi-Mumbai Industrial Corridor (DMIC),

which is being developed at a cost of USD 90 bn along a more

than 1,480 km stretch, will see major expansion of infrastructure

and industry – including industrial clusters and rail, road, port, air

connectivity – in the states along the route of the corridor. This

would also necessitate the construction and development of

appropriate housing units to cater to the demand emanating

from the 3 mn employees planned to be working in the corridor.

C&W Research estimates that 3 mn employees will translate to

at least 1.5 mn households, most of which will belong to the

affordable category. To cater to the housing needs of just the

employees of just DMIC, at least 900 mn sf of housing would

have to be developed, based on affordable housing guidelines of

minimum 300-1,200 sf prescribed by MHUPA. This construction

of housing units will require a minimum investment of about INR

1,800 bn for the units alone and further investments would be

required for development of social and physical infrastructure to

support the housing. Since of every rupee spent on construction

activity, 78 paisa gets added back to the economy as mentioned

earlier, nearly INR 1,404 bn could be reinvested in to India's

economy boosting the GDP higher. Similarly developing housing

in the Mumbai-Bengaluru Economic Corridor and the Chennai-

Bengaluru Industrial Corridor will contribute immensely to the

economy.

10


HOUSING SECTOR PROBLEMS

AND SOLUTIONS

The problems of the housing sector are varied and impact not

only the developers and the buyers, but the entire economy of

the country. There being a high correlation between the real

estate activities and a country's GDP, there is clearly the need for

a strong and buoyant real estate sector. The issues ailing this

sector can be broadly classified in the following ways; however, it

is important to note that each of them impact the developer as

well as the buyer.

Despite India's acute need for housing spaces as well as other

commercial workspace needs, project launch and completion

delays are becoming increasingly commonplace. Though there are

a variety of factors contributing to the delays such as bottlenecks

in the supply of raw materials and labour, difficulties in accessing

funding, impact of changing market dynamics, etc, it is the process

of complying with regulatory approvals that is contributing

substantially to the delays. The process of approvals is extremely

long drawn and tedious. The construction approval process is

complex and as per the report of the Committee on Streamlining

Approval Procedures for Real Estate Projects set up by the

MHUPA, there are a minimum 34 regulatory processes to be

followed by a developer for obtaining construction permits and

take an average of 227 days. However, informal surveys with

developers in metro cities like Bengaluru, Chennai Mumbai, NCR,

etc. and research findings by C&W Research suggest that current

regulatory processes are taking an average of 18-36 months time.

Any delay in project launches and completions result in cost

escalations of a project, which are passed on to the buyers, thus

making purchases highly unaffordable. According to industry

experts, the cost of building due to delays in approvals and

adhering to regulatory processes can raise the cost by up to 40%

of the sales value. This is a double whammy for the buyers who

not only have to keep paying their rents and EMIs to banks for a

longer period of time, but also have to pay more for the

increased costs. Not only this, many a time approvals from

environment department take several years. As per CREDAI's

estimates, as on 31st October, 2013 around 4,690 projects were

awaiting Environmental Clearance at the SEIAA level in the State

of Maharashtra. Most of them are waiting clearance since more

than 2 years; these comprise of investment of about USD 100 8

billion .

Solution:

Most of the departments / ministries / government bodies

TEDIOUS AND PROLONGED REGULATORY

PROCESSES

involved in the regulatory processes for issuing construction

permits have a similar checklist, which leads to duplication of

work and further delays. Having a single window clearance for all

the approvals will drastically bring down the delay and the costs

related to corruption. Given the availability of technology,

especially Information Technology, many processes can be

automated and the need for human intervention can also be

reduced substantially. Some cities such as Ahmedabad, Chennai,

Cochin, Kozhikode, Madurai, Trivandrum, Pune, etc are already

implementing an automated system for approving building plans.

Such measures need to be implemented across the country and

used in other processes too for reducing the time and costs

involved.

The approval practices have been streamlined in other countries

over the years benefitting the developers as well as buyers by

means of cost effectiveness and on time delivery of projects. In

Columbia during 1995, building authorizations in Bogotá took 3

years on average. However, today it takes just around a month

owing to a broad program of reforms targeting the construction

permitting process. Another example can be of Hong Kong SAR

(China), wherein as part of its “Be the Smart Regulator” program,

it merged 8 procedures involving 6 different agencies and 2

private utilities through a one-stop centre. Today a single window

facilitates interaction for customers. The committee appointed by

the Central Government on simplification of approval processes,

known as the SAPREP committee has submitted its report.

Expeditious implementation of the recommendations made in

report is much desirable.

Land is a limited commodity and the problem is aggravated by

the limited supply of developed land with basic infrastructure in

place. This is causing a rapid rise in land prices, which in turn is

leading to high cost of housing. Lack of clear land titles across the

country makes it difficult for the developers to acquire desired

parcel of land. Not only does it increase the cost of acquisition,

but may also involve long drawn and expensive litigation at a later

stage. Further unfavourable land management policies prevalent

in some states like the Urban Land Ceiling and Regulation Act

(ULCRA) are some of the major roadblocks faced by this sector.

Though the Central Government has abolished the Act, some of

the states are yet to do the same. Land being a State subject, the

laws governing land differ from state to state in terms of outflow

for property taxes, stamp duty and registration charges. Further

low utilization of available land through low Floor Space Index

(FSI) ceilings set in different cities, leads to lesser residences

getting developed on a piece of land and translates to lower

income for the developers, who is forced to raise the cost of

each unit to cover the land costs. Finally, though there much

support by all stakeholders for the Right to Fair Compensation

LAND RELATED PROBLEMS

8 I USD = INR 61.13

January 2014

HOUSING:

THE GAME CHANGER

11

FSI ACROSS PROMINENT INDIAN CITIES

INDIAN CITY AREA MAXIMUM FSI

Kolkata City 3.00

Salt Lake 5.95

Rajarhat 2.50

#Bengaluru City 4.00

Mumbai Island City 1.33

Suburbs 2.70

BKC 4.00

NCR Delhi 3.50

Gurgaon 1.75

Noida* 3.50

Chennai City 3.50

* Additional 5% of permissible FSI is being proposed for Noida's Green Buildings and

discussion on making it applicable on other Indian cities is still on.

# In case of proximity within 150m radii from any Metro Station


FSI ACROSS PROMINENT GLOBAL CITIES

COUNTRY CITY MAXIMUM FSI

Bahrain Bahrain 17

U.S.A. New York Downtown 15

U.S.A. Los Angeles CBD 13

U.S.A. Chicago CBD 12

China Hong Kong 12

U.S.A. San Francisco CBD 9

Thailand Bangkok 8


and Transparency in Land Acquisition, Rehabilitation and

Resettlement Act, 2012 (previously known as the LARR Bill),

certain provisions of the Act could hinder the development of

real estate projects and also push by the land acquisition costs

substantially.

Solution:

Given that developable land in India is limited and to keep pace

with the increasing urban population, the vertical growth of cities

is extremely critical. Thus, re-densification of cities is required to

provide adequate housing for all the inhabitants and also cater to

the migrants. The tables below portray the range of Floor Space

Index (FSI) prevalent in prominent Indian cities. These FSI figures

fall way short of those in prominent international cities as can be

seen in the adjacent and pose as a significant impediment to

further urbanization. Restrictive land use raises the cost of

tenements and spoils the green cover, so the FSI norms need to

be re-looked at as was recently done by Andhra Pradesh where

the concept of FAR has been removed, leading to stabilization of

prices and creating adequate supply.

Apart from revision of FSI norms, other land reforms also need

to be undertaken. Land pooling schemes, already implemented in

Delhi and Gujarat are some innovative methods to acquire land

at a fast pace but at reasonable rates. These should be

encouraged across the country. To give impetus to the housing

sector, the basic infrastructure needs to be developed at a faster

pace so that newer areas with basic infrastructure like water,

electricity, roads and drainage are available to developers. Town

planners have a crucial role to play in identifying areas whose land

use needs to be changed as per changing needs of the growing

city.

For a developer, gathering the initial funding poses as a big

challenge, especially for new entrants; curtailing the housing

supply to a large extent. The RBI has set threshold for the total

maximum exposure to real estate, including individual housing

loans and lending to developers for construction finance, for

banks at 15%, which is quite low and is curtailing the growth of

the sector. Absence of long term funding from banks is forcing

developers to look at alternative sources of funds, most of which

do not offer affordable interest rates and hence, the supply is

being stifled.

In the case of individual buyers, the persistently high inflation

rates have made them suffer in multiple ways affecting their

buying ability. Besides having lesser disposable incomes and

savings, they are faced with increasing housing prices, further

compounded by the high interest rates on mortgages.

Solutions:

a) Banking & Fiscal Reforms

• Housing Finance Corporations (HFCs), Non-Banking

Financial Companies (NBFCs), Micro Finance Institutions

(MFIs), Private Equity Investors (PEs), etc need to be

encouraged through simpler regulations and incentives to

increase the inflow of funds to the sector. Further, the RBI

should expand its scope for 'priority lending,' to cover even

lending to developers involved in low-cost and affordable

housing as cheap funding is extremely critical for them to

develop low cost housing projects.

• Granting the sector the status of 'Infrastructure/Core

sector' or recognising it as an 'Industry' will influence the

RBI to declassify the real estate sector as 'high risk.' Housing

should be recognized at par with as infrastructure sector

and should be given cheaper project finance and the roll-

over facilities also should be at par with other industries.

Currently, real estate has a risk weight of 1.25 which is quite

FUNDING PROBLEMS

12


high. Lowering of risk weights in turn will result in lower

interest rates on loans and increased availability of banking

and financial institutional funds to both developers and

individuals at competitive lower rates.

• The Securities and Exchange Board of India (SEBI) is

expected to soon allow REITs to operate in India. This will

be a step in the right direction for deepening the Indian real

estate market. Providing tax incentives to REITs for

investment in housing, especially the affordable housing

sector will give a much-needed fillip in making these

successful.

• The secondary mortgage market needs to be promoted by

the Reserve Bank of India through Mortgage Backed

Securities (MBSs) and Collateralized Mortgage Obligations

(CMOs) with safeguards in place to avoid a sub-prime crisis

in India, similar to that in the U.S.A.

b) Tax Reforms

In the purchase price of a house, the total element of tax is

between 30 to 37 % in most cities, which includes direct and

indirect central taxes, state taxes like VAT, LBT, Stamp Duty,

Municipal Taxes, Cess, premiums and development charges, etc. In

cities like Mumbai merely a single Cess like Fungible Premium

accounts for 10 to 15% of the sales value. Hence, rationalisation

of taxes is one of the key 'Mantras' to reduce housing prices. This

could be achieved in the following ways:

• Providing suitable incentives and concessions to developers

involved in housing projects and encouraging Public-Private

Partnerships (PPP), especially for the affordable housing

segment will give an impetus. For example, the

reintroduction of Income Tax deductions under Section 80-

IB will also incentive developers to build affordable housing

projects.

• Given the persistent high interest rates for mortgages and

the inability of developers to reduce costs, individual home

buyers need to be incentivised through tax exemptions and

subsidies. The Union Government had in the past

introduced some of these and they had increased buyer

confidence. However, they have either been revoked or

limited to very narrow band of beneficiaries with some

measures such as the recently introduced interest

subvention of 1% on housing loans of upto Rs 25 lakhs for

homes valued at upto Rs 40 lakhs being limited for only 2

years. The Government needs to keep such measures in

place for some time as they will go a long way in aiding

buyers.

• Purchase of a housing unit incurs around 36% in direct and

indirect taxes which includes VAT, Service Tax, Excise Duty

and Municipal Taxes, to name a few, which is extremely high.

The proposed Goods and Services Tax (GST) should include

all of these along with stamp duty and registration charges at

a more reasonable rate. Subsidies for such high taxes will

not reduce the revenue for the government, rather it should

be noted that a similar tax exemption in 1998 had rather

increased the indirect tax revenue of the government

manifold.

• Special Residential zones on the lines of SEZ, with built-in

tax exemptions for a period of 5-10 years are need of the

hour and a policy to promote their development could be

introduced.

Despite being the second largest employer in the country, the

construction sector as a whole faces manpower shortage.

Further, the sector is heavily dependent on manual labour, faces

longer time lines for construction completions, which results in

supply getting deferred. Hence, technologically, faster and

alternative methods of construction need to be adopted on a

large scale, so special training for certain skills would also need to

be imparted.

Solutions:

• Special construction equipment being imported should be

subsidised and the import duty should be waived off.

• Similarly, construction materials and manufacturing units

specialising in substituting imported materials should be

given subsidy.

• Excise duty, etc should be waived off for pre-fabricated

construction elements.

If the recommendations of the Report on Affordable Housing by

the Task Force appointed by the MHUPA are implemented, the

stock of housing units targeted at EWS and LIG segment will

increase substantially and improve the overall socio-economy

conditions.

For those who cannot afford to buy a house, organised

development of rental / social housing is also required. In most

developed countries, social housing is widely accepted and

prevalent; in Asia, Hong Kong and Singapore have highly successful

public housing programs that cater to above 50% and 85% of

their populations respectively. Public / Social housing owned by

the State government, local Government bodies, NGOs or even

in public- private partnership could be developed to provide

rental housing where the rents can be subsidised by the

government to keep them low for the needy. Making rental

MANPOWER & TECHNOLOGY PROBLEMS

ADDITIONAL SOLUTIONS / REFORMS

January 2014

HOUSING:

THE GAME CHANGER

13

income tax free or subsidising the tax might also result in housing

units that are currently locked up (estimated by the Census 2011

to be around 11 mn in urban areas) to be freed up for renting,

besides attracting developers and financial institutes in developing

and owning large rental housing projects.

Whilst the Government is already aware of a number of these

solutions and is also working on some of them, it needs to

increase the pace of these much needed regulatory reforms.

14


The state of the housing sector is co-related with infrastructural

development and development of new industrial areas, SEZs and

new business districts in any city. Growing presence of new

industrial and commercial hubs is an important indicator of the

changing landscape. Large township projects in suburbs like Powai

in Mumbai have changed the skyline of this area and a similar

trend is being witnessed across most cities, where the arrival of

many IT-ITeS and BFSI companies, and the setting up of SEZs has

led to many housing projects, including large integrated townships

being launched.

As per the latest Economic Survey of India, institutional credit for

housing investment is expected to grow at a CAGR of about 18-

20 percent per annum in next three-five years and the housing

sector's contribution to GDP is likely to increase sudstantially.

The domino effect of the housing sector is far reaching through

direct, indirect as well as induced effects on the country's

domestic production, consumption, employment and revenues.

Further, the close interrelationship existing between the housing

sector and the well being of a nation were brought to the fore by

the bursting of the U.S.A.'s housing bubble, which kicked off a

deep recession in all parts of the world as well.

In the recent years, we have seen Public Private Partnership (PPP)

models being introduced for large scale developments. However,

developers face major constraints in financing housing projects

despite the huge demand-supply gap and the sector cannot be

developed through domestic Government and private sector

funding alone. The real estate sector's highs and lows since 2005

and the consequent government policy to allow FDI in the real

estate sector led to substantial development in 2007 and 2008

before experiencing a downturn. However, the FDI flow in

housing and real estate was at only 4% of the entire FDI flow in

India for H1 2013, whilst it was a poor 6% even in 2012. Yet, there

is strong potential to attract even more FDI in to the sector as

the interest from even international private equity and venture

capitalists is quite high. But this is possible only with the joint

efforts of the industry participants and government both.

To boost the housing sector, governments at both national and

state levels have a crucial role to play and their participation

cannot be undermined. In India, the Central Government has

taken some positive steps in this direction such as replacing the

archaic Land Acquisition Act of 1894 with the recently passed the

Right to Fair Compensation and Transparency in Land Acquisition,

Rehabilitation and Resettlement Act, 201 (popularly known as the

LARR) and seeking to introduce a Real Estate Regulation Bill to

regulate the housing sector. Further, the recent relaxation in

External Commercial Borrowing (ECB) norms for affordable

housing and the proposal to relax FDI norms for housing projects

is expected to ease the flow of fund and lead to more supply.

However, these are still not enough for the growth and

CONCLUSION

Urbanization in India has generated huge demand for housing for

which neither the cities nor the housing sector is prepared for.

Besides an annual 2.1% rise in the number of urban

agglomerations resulting from the population growth and the

development of new urban centres, an increasing deficit in

housing supply coupled with rural migration will result in the

proliferation of slums in cities other the existing metros. This

urban explosion cannot be ebbed, but needs to be catered to

through a comprehensive and immediate change in development

control norms like FSI limits, land use patterns, building norms,

etc and through policy measures related to release of land

parcels, taxation, finance and investment regulations, etc

otherwise even more slums will mushroom up, dragging down

the productivity and economic growth of the cities. The cities

need to grow horizontally as well as vertically and bring the

peripheral areas closer through multiple alternatives of good and

fast connectivity and strengthening of physical and social

infrastructure. Since around 95% of the housing shortage in

urban areas emanates from the EWS and LIG categories,

alternative methods of providing a home to them need to be

implemented. Most developed countries have rental housing in

place to cater to the needs to these segments. In India too,

participation of innovative public housing structures are required

for eliminating slums and providing respectable living for all; so

the government has a critical role to play in development of

liveable, inclusive cities.

Owning a house is also the most important form of financial

security for most Indians. A residential property usually

appreciates handsomely over time, beating the inflation rate

significantly and it can be used to derive value through selling or

by mortgaging to meet various personal needs. Consequently, we

see most families toil all through their lives to own their dream

homes. However, given the increase in incomes, especially double

incomes in families, and the explosive growth in middle class

population that is also recording increasing number of nuclear

families, the demand for housing is increasing unbridled.

The growth of the housing sector has had a multiplier effect on

the Indian economy and has been a big driver of economic

growth. The housing sector generates direct mass employment

for unskilled, semi-skilled and skilled labourers as well as many

white collared workers; indirectly however, many more jobs are

created. Housing is second largest employment generating sector

after agriculture in India, which drives the labour market and a

host of vocational activities and livelihoods are dependent on this

sector for socio-economic development. The growth and

development of the housing sector plays a major role in

attracting substantial investments from both public and private

sectors.

January 2014

HOUSING:

THE GAME CHANGER

15

development of the sector, the quick transformation of which is

imperative for local and regional economic development as its

impacts are manifold.

As discussed throughout this paper, the advancement of the real

estate sector will have direct and indirect bearing on India's

economic growth, employment and other industries and sectors,

so it is imperative that the Government fast tracks the pending /

on-going policies and regulations. To reiterate, employment in the

real estate sector is estimated to be around 7.6 mn, and it has the

potential to rise to 17 mn by 2025 leading to increase in

employable workforce and contributing to the overall economic

growth.

The housing sector in India holds tremendous potential to have a

positive impact on the economic and social development of the

country. A number of incentives such as subsidized land, higher

Floor Space Index, timely approvals, concessions and tax

exemptions, funding to name a few are necessary to aid

development of housing projects. The rise in population and

migration from rural to urban areas has led to pressure on

infrastructure and increasing costs coupled with the unavailability

of requisite units has made housing inaccessible to lower strata of

population. As per our estimates, the current shortage plus the

expected future demand for housing has increased to 88.78 mn

units, which will require an estimated investment of INR 106.54

trillion (tn) at today's values. Given the direct multiplier effect of

78 paise for each rupee invested, the estimated investment will

channelize INR 83.10 tn back to the economy further

accelerating the economic growth. Therefore, it is imperative that

the Government adopts successful strategies from developed and

developing nations to reduce this shortage and ensure that the

basic need is satisfied.

16


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January 2014

For more information about C&W Research, contact:

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National Head – Research Services, Cushman & Wakefield

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Director – Marketing & Communication, Cushman & Wakefield

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Authors of the reports:

Siddhart Goel

National Head – Research Services

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– Research Services

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Manager - Research Services

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Divya Grover

Deputy Manager - Research Services

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Divya Bajaj

Associate - Research Services

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Megha Maan

Senior Manager

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