Real Estate Developers in India Switching from Luxury to Budget Homes

Real estate developers in India have begun concentrating on budget homes instead of luxury developments. Prices have been falling and demand has been weak for luxury property in India for some time now, but recent government incentives in the form of interest reductions on smaller mortgages and government payouts have given a much needed boost to the "affordable," segment of the market.

Olympia in Chennai, developers of the Opaline luxury apartments on the Old Mahabalipuram Road, have added compact homes of 500-1,000 sq ft each to the existing projects and have sold 100 apartments within a month. Chaitanya and Vijay Shanti, luxury developers in Chennai have started marketing more affordable projects also.

Vishal Gupta of Ashaiana Homes and Finance believes the government's role in triggering real estate sales was two-fold. "As a group, Ashiana has always been in the Rs 13-25 lakh category with some projects in the higher ranges of Rs 45-70 lakh as well. But we have seen a progressive weakening of the market since October. November was a bad month with the number of site visits very high but conversions at an all-time low. In December, since the government's move to reduce home loan interest rates in the sub-20 lakh loan slab, the sentiments have improved considerably and buying has restarted."

Gupta, in fact, feels that even the Pay Commission hikes and payment of arrears to the government and public sector undertaking employees has triggered a fresh round of buying in the budget market.

Rajeev Rai,Vice President of Assotech said,  "We do not see the average cost of units in the Metros and tier I cities dropping below Rs 20 lakh. The impact of the government dropping interest rates on houses has not been significant. We are expecting another booster dose from the government soon, which may help buyers in the larger cities. However, we have seen a better buyer response to our projects in smaller cities such as Rudrapur and Gwalior, where projects are in the Rs 13-20 lakh range. The number of enquiries have gone up by 50-70% and conversions too are 20% higher." Rai too feels that in addition to the lowering of interest rates on smaller loans, the Pay Commission pay-outs to the government sector has resulted in increased sales.

In Indore, realtor Pradip Agarwal has noted a 20% in enquiries and transactions of apartments in the Rs 15-20 lakh range. In Jaipur, realtor Anil Rohilla has personally supervised at least three transactions in the last week in the Rs 8 lakh category and serviced about 20-25 enquiries.

Rai also feels that to actually make a difference, the difference between the cost of lending and the cost of raising the funds for the banks has to be substantial. Banks are still not lending at the pace that can trigger a bull run in affordable housing. But the National Housing bank's announcement of Rs 20,000 crore being released to banks for financing affordable homes has worked and banks are more responsive to these loan requests.

Clearly, developers who had inventory or could immediately create stock in the category have been in a better position to take advantage of the changes, and it is likely that other luxury developers will follow suit. The term "affordable," has been bandied around by the government and developers for a while now, but this is the first time anything positive has been done towards meeting the needs of this sector.  There was a huge shortfall of affordable homes across India thanks to developers ignoring local demand in favor of luxury apartments. But as the luxury market came to a grinding halt that has begun to change. However, to boost this category, the government needed to provide some incentives to the private sector so that the required scale of development would happen. In addition to the differential rates of interest for affordable housing, the government may also need to provide incentives to developers to create more stock in the affordable category. This may happen in Budget 2009.

In another related survey, Brix Research, the knowledge centre of MagicBricks, conducted extensive online and offline surveys to understand what users would consider affordable. Most professionals living in big cities stated that Rs 25-35 lakh was their affordable budget for housing. Others belonging to smaller cities or even suburban areas of big cities said that a house between Rs 5-15 lakh was "affordable" for them.

Obviously, there is still a huge unmet demand for budget housing, although the present move has just scratched the surface. Statistics have also revealed that the quoted figure of 24.7 million housing units' shortage across the country may have grown. The financial crisis means Indian developers can no longer rely on foreign investors and well-to-do NRIs, and must therefore look to satisfy local demand. I have a feeling this will eventually be a positive move for the Indian luxury real estate market, leading, in time, to renewed interest in buying property as an investment.