Can development of Secondary Mortgage Market help fix the housing shortage in India?

Author: Sachin Gupta | Find me on Twitter Follow @sach_gupta

As has been documented on numerous occasions about the shortage of housing in India, till 2012 (as per the census results) the housing shortage in urban areas stood at 18.78 million units**. About 99% of this housing shortage pertains to the economically weaker section (EWS) and low income group (LIG) categories. That’s a whopping number and constructing those many housing units for growing urban population will take enormous effort on the part of government, private businesses, and finance ministry.

Providing low cost housing finance to plug the housing shortage is seen as the key ingredient. However, most banks use traditional products such as using funds from deposits to finance long term housing loans. Therefore, to provide housing on a scale as large as in India, the concept of secondary mortgage market may well soon be adopted in India. In this article, we will briefly talk about the secondary mortgage market and why it is difficult to implement in India.

What is a Secondary Mortgage Market:

The secondary mortgage market is active in developed economies such as USA, Europe, Japan, Australia, etc. The primary function of this market is to provide a mechanism for refilling funds used by mortgage originators (Banks, Housing Finance Companies, etc.). This, in turn, enables them to maintain a flow of new mortgage origination during periods of rising and falling interest rates. They may accomplish this by selling mortgages directly to government agencies or private entities. Or they may form mortgage pools and issue various securities, thereby attracting funds from investors who may not otherwise make investments directly in mortgage loans. Hence, much like any corporation raising funds for doing business, the primary goal of mortgage originators in today’s market is to replenish funds by reaching broader investor markets.

In addition to direct sales of mortgages from originators to investors, many large mortgage originators found that they could place mortgages in pools and sell securities of various types, with mortgages in these pools serving as collateral. With the assistance and expertise of investment bankers, large mortgage originators can then issue securities in small denominations which would be purchased by many more investors. Firms with smaller mortgage origination volumes could continue to sell mortgages directly to government agencies, which in turn would create large pools of their own and issue securities.

Many types of mortgage related securities have been developed in recent years. The number and types of securities are continuing to increase as mortgage originators, investment bankers, and government agencies continue to innovate and reach investor markets that provide the ultimate sources for many of the funds used in new mortgage origination. Major types of mortgage backed securities are:

1. Mortgage backed bonds (MBBs)
2. Mortgage pass through securities (MPTs)
3. Mortgage pay through bonds (MPTBs)
4. Collateralized mortgage obligations (CMOs)

Why it is difficult to implement in India?

RBI recently came out with a report listing down the reasons for non-implementation of secondary mortgage market in India:

1. Low Investor Base
2. Cultural factors
3. Poor capital market infrastructure
4. Regulatory environment
5. Legal hurdles
6. Lack of proper accounting standards
7. Taxation
8. Poor quality of assets
9. System deficiencies
10. Lack of standardization

Road Ahead:
It is clearly evident from the discussion above that development of secondary mortgage market in India is inevitable given the scale of housing stock that needs to be provided. And sooner, we as a country fix some of the issues facing secondary mortgage market; the better it is for growing urban population and economic growth of the country. In 2011-12, the housing loan disbursed to individuals stood at Rs. 68221.12** Crores. With secondary mortgage market in place, this disbursed loan amount can achieve the global levels. And at the same time, provide a mechanism for transparent debt markets.

** Source: National Housing Bank

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10 reasonably-priced property markets of India

With real estate prices shooting up, people are wondering which places have affordable properties. Check out some affordable property markets in India.

The metropolitan cities of India are considered to be the center of the country’s economy and cosmopolitan culture. They draw the most demand for providing better opportunities, infrastructure, and standard of living. Due to rapid urbanization, these cities are facing the challenges of high property prices, pollution, and traffic issues. Infrastructural developments support towns and cities with emerging or growing sub-markets. Here are some cities that offer real estate at a lower budget.

• Hyderabad, Telangana

After the slump due to the global recession, Hyderabad’s real estate market is all ready for an upswing. Due to a thriving economy and dynamic workforce, along with redevelopment of plots in Shankarpally, the city is turning out to be a buyer’s market. People are witnessing a growing demand for residential, commercial, and retail plots in Hyderabad. Compared to other cities, Hyderabad is relatively affordable. Also, due to political uncertainty, land prices in Hyderabad have remained stable.

• Pune, Maharashtra

Today, a blend of Pune’s manufacturing and service sectors make it a perfect economic powerhouse. Many players are entering this city with excellent expensive projects. New entries can also be seen making their way with affordable housing segment. This is where the major demand lies because the budget is far more attractive to investors.

• Navi Mumbai

Real estate market in this area and other surrounding areas have shown impressive growth because of the planned approach taken during development. While property prices have become increasingly unaffordable in Mumbai, Navi Mumbai still provides multiple options.

• Jaipur, Rajasthan

Jaipur is a fast-developing city that has progressed tremendously on residential and retail fronts. It is one of the most important real estate destination of North India. Due to its tourist attraction, the government too is taking a keen interest in developing infrastructure in this region.

• Surat, Gujarat

Known as the diamond capital of the world, Surat is a famous city in Gujarat. It also gained recognition for being the cleanest town in India. Improving infrastructure helped modernize the city. The excellent road network comprises of well-constructed flyovers and wide roads.

• Ghaziabad, NCR

Ghaziabad is slowly rising as an emerging residential neighborhood of NCR, which has a high supply of residential properties in the budget of 30-50 lakh. The city boasts of a large supply of ready-to-move-in properties by reputed developers. Residential corridors are widely attracting a large number of investors and end-users due to the relatively available housing units at affordable price.

• Nagpur, Maharashtra

Though Nagpur has varied climatic conditions, it is a fast-growing city. Set to be the next IT hub of Maharashtra, real estate investors are carefully monitoring its success. Right now it is a great deal of real estate development, so, investors can dare to invest here.

• Kochi, Kerala

This place has a modern and metropolitan lifestyle. It is known to be a smart city and townships in kochi have significantly increased demand for real estate. Today, the residential market of Kochi is dominated by affordable housing segment.

• Coimbatore, Tamil Nadu

This city has gained momentum as a preferred destination for IT/ITes. With a proactive government in power, Coimbatore's property market has seen an upward push in demand for residential units in the core areas of the city such as R S Puram, Avinashi Road, and Race Course, which are considered posh areas.

• Ahmedabad, Gujarat

Ahmedabad city is a prime example of fast-paced development with huge investments pouring into the state and advanced infrastructural development in the form of bullet trains.

These property markets are said to have a lot of potential when it comes to affordable housing. Based on one’s preference and budget, you can purchase a home or commercial property in any of these cities.

This is a guest post by Deepak D.Yewle

Hits and Misses of Budget 2015 for Real Estate Sector in India

Author: Sachin Gupta | Find me on Twitter Follow @sach_gupta

Leading up to 28th February 2015, Budged 2015 was the most talked about event among business circles. Real estate developers, housing finance companies, banks, consultants were banking on reforms to boost the real estate sector. Did the sector get its due? Or there still is uncertainty looming large? We find out:

• Allocation of Rupees 14000 Crores (2015-16) for National Housing Mission:

Prime Minister Narendra Modi has spoken about housing for all by 2022. As per the recent figures, there is need to build about 2 crores houses in urban areas and 4 crores houses in rural areas. National Housing Mission will be prepared by ministries of rural and urban development. This mission will subsume existing housing schemes. 60 Lacs houses will be built yearly for next seven years in rural areas.

• Tax benefits for Real Estate Investment Trusts (REITs):

Mr. Jaitley in his budget 2015 speech rationalized capital gains tax regime for the sponsors of newly-created business structure REITs. At the same time, the Budget also proposed that the rental income arising from real estate assets directly held by the REIT would be allowed to pass through and to be taxed in the hands of the unit holders of the REIT.

"I therefore propose to rationalize the capital gains regime for the sponsors exiting at the time of listing of the units of REITs and INViTs, subject to payment of Securities Transaction Tax (STT). The rental income of REITs from their own assets will have pass through facility," Mr. Jaitley said.

• No incentives to affordable housing sector:

The real estate industry was expecting that government would grant infrastructure status to affordable housing sector; however, budget 2015 disappointed them on this count. With infrastructure status, the cost of borrowing would have decreased for developers as well as home seekers.

• Hike in service tax:

The service tax has been hiked from 12.36% to 14%. In other words, the cost of home will now go up. With this hike, the property value will rise by 0.41% of the old property value (when service tax was 12.36%).

• Introduction of Benami Transaction Bill:

Mr. Jaitley announced the introduction of Benami Transaction Bill in his speech. The whole idea behind this bill is to curb black money in the property market. Prohibition of acceptance of an amount of more than Rs 20,000 in cash for any property deals is also part of the bill. However, will this bill have any impact on the realty market? Some feel, while the intent of government is good, but this may result in investors exiting the market.

• Fiscal Prudence (Which means EMI may start to come down soon):

While the budget 2015 was a dampener for most real estate stakeholders, however, they all looked at the surface and did not scratch it. Most important factor has been missed by all Pundits looking at the real estate sector. Mr. Jaitley’s focus on fiscal consolidation will go down well with RBI. What it means? Well, the interest rates may start to come down soon. A reduction in interest rate will be good news for home loan consumers and those planning to take a loan to buy houses and cars. Sector revival is expected once interest rates begin to come down.

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Housing Shortage and Housing Finance Facts in India

Author: Sachin Gupta | Find me on Twitter Follow @sach_gupta

'Roti, Kapda, aur Makaan' was a famous movie that highlighted the 3 basic requirements of life. And yet, a closer look at the 'Makaan' or housing statistics in India, we notice that there is still a long way to go before we fulfill these basic requirements in the lives of millions of people in India.

The new government in the center promises to provide 'Housing for All' by 2022. However, in order to achieve such results, the housing finance sector has to evolve at a greater pace. Currently, Mortgage to GDP ratio in India stands at 9%, which is much below the average of advanced economies.

Find below the detailed info-graphics showing the housing shortage and housing finance facts in India. The task of 'Housing for All' may seem daunting, however, it also presents an opportunity unprecedented in human history.

Housing and Housing Finance Facts in India | Create Infographics

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Affordable Housing Projects on a Rise in India

In the recent past, affordable housing projects are on the rise in India. The government has also taken several measures in order to promote affordable housing. The following post explores the same.

• Introduction

India has been a land of stark contrasts when it comes to the real estate and property market. At one side, impenetrable metro areas have witnessed some of the highest property rate increases and have attracted new dwellers from all over the country; on the other side, the overall property trends for the country have experienced a much lower uniform growth and investors have been complaining that they are not getting expected returns on the money that they put in the real estate market.

Despite the apparent slump in the property market for high-end housing projects, builders and development companies working in the low income housing sector have reported great sales and returns. Through special packages, attractive pricing, and targeted focus on mid-level income groups, these developers have ensured high sales and have created so many great options for investors pan India that they are at times confused over which package would offer them the best deal. The initiatives by the central government have also considerably aided these changes and made affordable housing more popular.

• An urge by the central government for increased focus on affordable housing

The market may have become saturated for luxury and high end segments, but the affordable housing segment is not just on a high, it is experiencing a boom. Simply designed, high quality homes that are aimed at low income groups, and offer buyers a lot of flexibility when deciding a payment plan are a huge hit and have made the builders in this segment very happy. For example, in Chennai, with an advance payment of as little as INR 1.25 lakh some builders will offer you a  new home.

M Venkaiah Naidu, the Minister of Urban Development and Housing and Poverty Alleviation, has asked banks across the country to make it easier for people with low income to get financing for home loans in a simpler manner. He also issued an expeditious completion order to the various builders involved in affordable housing projects, and made it their top priority.

• Affordable Homes on the Rise

The push by the central government towards an increase in affordable housing is not just for a few cities, but for the country as a whole. The urban poor in particular, slum dwellers and people living on rent should have increased access to cheaper homes, and the government is trying to make sure that this happens.

Of late, the Bangalore property market has also witnessed the launching of affordable homes. Several builders are investing in new projects that belong to the affordable category. Needless to say, an increased demand has been witnessed in this particular segment. Real estate developers like Tata Housing Group and Provident Builders have already forayed into this segment. Welworth City at Doddaballapur, is the first flagship affordable housing project in Bangalore.

On the other hand, Tata Housing is all set to launch its maiden affordable housing project under the banner New Haven. Managing director and chief executive officer Brotin Banerjee, of Tata Housing said in a statement, “Envisaging a rising demand for affordable homes with premium facilities in the Silicon Valley of India, we are pleased to bring this iconic and successful affordable housing brand for the people of Bangalore”.

Localities in Bangalore where affordable homes are on the rise are Mysore Road, Hosur Road, Kanakpura Road. Investors are targeting these areas to build affordable housings.

Kerala has sanctioned a sum of INR 14.59 crore for the development of homes intended for the individuals and families belonging to low income groups. Tamil Nadu is also experiencing a high, with the Chennai-Vizag industrial corridor, and that will bring in a new wave of affordable housing projects. Chennai in particular has already several such projects underway, with some builders offering homes at prices as low as INR 18 lakh.

Industrial development schemes are also expected to close the gap between the number of people living in the low income bracket, and the affordable housing projects that are available to them.  With thousands of workers who will need affordable homes close to the new factory and plants that will open up, the demands for homes that offer quality at a low price will also rise exponentially.

• Schemes available for individuals falling in the low income bracket

M Venkaiah Naidu,  has asked the banks to make it more attractive for individuals belonging to the low income bracket to apply for home loans. He also requested that the process be made simpler. A central bank that governs property development across India is needed, and Naidu says that either the NABARD will need to have its jurisdiction extended, or an alternate organization like the SIDBI will have to take up this new role. Schemes that encourage builders to use new technologies have also been discussed, and construction tools like gypsum boards are expected to be used to make these homes, ensuring the quality in the construction work, while bringing down the overall costs even more:

1. Banks to make home loans more attractive for low income groups
2. A central body to be put in place for managing development of affordable housing pan India
3. Use of newer technology in construction to be encouraged in order to reduce costs

• Price trend for affordable housing projects

Low income houses across India are becoming even more affordable. Newer construction technologies reduce the cost of building a home, sometimes by as much as half. The average cost of building a house will now be closer to Rs 900 per square foot, as opposed to the normal Rs 1500 per sq foot. Combined with the government plans that will provide builders, land at subsidized rates, affordable housing is expected to become a lot more affordable.

This is a guest post by Puspashree Mohanty

List of Town and Country Planning Department for various states in India

Author: Sachin Gupta | Find me on Twitter Follow @sach_gupta

Town and country planning is an integral institution of state’s urban development. The Department of Town and Country Planning is responsible to regulate the development and also to check the haphazard development in and around towns in accordance with the provisions of state’s formulated urban development policy.

In order to involve the private sector in the process of urban development, the Department grants licenses to the private colonizers for development of Residential, Commercial, Industrial and IT Park/Cyber Park Colonies in accordance with the provisions of the State’s Development and Regulation of Urban Areas Act. These licenses are granted to the owners having clear title of land in their favor.

Private real estate developers or colonizers are expected to pay fee to ‘Town and Country Planning Department’ for land conversion, and License grant.

The Town & Country Planning Department is meant for the preparation of master plan for cities and towns, along with Zonal Development Plan. Department is also technical adviser to all the Development Authorities, Regulated Areas, Urban Local Bodies of the State. Other than this, the department is also involved in framing of the State Housing policies. Various Buildings Bye Laws, Zoning Regulations with reference to the administrative control of Housing and Urban Planning Department of the State come under the ambit of Town and Country Planning Department.

Customers who buy apartments from private developers should visit the local state ‘Town and Country Planning Department’ website to verify the project License number and other related approvals.

Here is the list of Town and Country Planning Department for Indian states.

List of town and country planning department for various states in india from Green Realtech Projects Pvt. Ltd

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List of Housing Boards in India

Author: Sachin Gupta | Find me on Twitter Follow @sach_gupta

To boost housing projects all over India and to achieve the goal of urban and housing development, Housing Boards have been formed in various States of India. These boards work towards expansion of the property market and development of well-planned and ideally located colonies. Incorporated by the Government of different States after hard work and strenuous efforts of many months, the mandate of the Housing Boards is to carry out well organized as well as aesthetically designed development programs all over the nation.

The objectives of the Housing Boards of India are:

• To provide housing solutions to needy citizens at reasonable prices.
• To construct houses and to allot them under the categories of high-income group, middle-income group, and low-income group.
• To select the sites for housing and decide the services to be provided.
• To formulate schemes for self-financing that helps the middle and high-income groups.
• To construct commercial complexes, multi-storied buildings, and shops and then to lease them out so as to secure financial resources.

Here is a detailed list of housing boards across India:

List of housing boards in india from Green Realtech Projects Pvt. Ltd

Source: National Housing Bank

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Real Estate Bubble in India! Will it bust and will property prices come down in India?

Author: Sachin Gupta | Find me on Twitter Follow @sach_gupta
 

On recent interaction of our team with broker’s community in Delhi NCR region, one can easily feel that the business is down on accounts of slow transactions. One of them even quipped, “If players such as DLF start launching 80:20 schemes you can understand”. One of us asked…but “why are prices still moving up”?

Well, our team discussed the scenario "will real estate prices fall”? Sales volumes are shrinking; government policies are not helping the sector either…so, will prices come down? Here are some of ideas we came up with which suggest “YES” prices will come down.

Why did prices appreciate so fast in recent years?

• Favorable demographics

Well, we all know about favorable demographics theory and it still exists. It will continue to exist. The urban population is supposed to grow from 340 million in 2008 to 590 million in 2030. During the same period, the urban middle class households will rise from 22 million to 91 million. However, what we need to mention here is that this kind of urbanization needs affordable housing and not swanky villas and luxury apartments. We need apartments that can be provided for about Rs. 1 million in order to satiate this massive urbanization. Do we find anything within this budget? NO…unless the government policies, builders interests are aligned, we may never have the kind of affordable housing that we as a county require.

• Shortage of housing

We all know there is a shortage of housing in India…or shall we say affordable housing. Till 2012, the housing shortage was estimated at 26.53 million. How can this huge gap be filled? Well, it isn’t going to be filled anytime soon because misaligned interest of government policies, lack of focus on affordable housing, and developers interests.

• A move towards nuclear family

Families are getting nuclear and all of them require housing.

• Easy credit

During those good old days of 2003-2008, credit was cheap and economy was growing. People borrowed at low interest rates and invested heavily in Property in India….primarily in residential asset class.

• Increase in black money that needed to be parked

Government records suggest that there are only 35 million taxpayers, about 3% of the population. Out of which 1.5 million declare yearly earnings of more than 10 Lac rupees. Shall we believe this? NO.
Well, we all know businesses under-report their incomes to save on taxes. This unaccounted income now has to be parked somewhere and real estate is the place it is parked because of ability of real estate to absorb huge amount of cash.

• RBI released excess liquidity into the economy during 2009-12

Post Lehman Brothers collapse, all major economies around the world provided stimulus to their economy to keep the investment and demand going. This excess liquidity through various channels ended up in Real Estate in India and prices were zooming.



Why would prices now come down?

• High inflation and lack of affordable housing

What has changed now, that will bring prices down? Demographics, housing shortage, and formation of nuclear families are still prevalent fundamentals. True, but as we discussed, the need of the hour is affordable housing to fulfill this demand. However, as things stands “government is not in any hurry to fix the issue of affordable housing”. The Income levels have not kept pace with inflation, Supply of affordable housing projects is low, and lack of job growth has all put pressure on real estate and there are no takers now.

• Elections coming up

Elections will further put pressure on realty sector. Real estate has been a parking place for unaccounted funds. The need for funds in upcoming Lok-Sabha and state elections will aggravate the outflow of money from this sector over the next 18 months.

• Rising government subsidies

When government subsidies rise, it tightens the liquidity in the economy and cost of borrowing increases. Subsidies remain high and all attempts towards fiscal consolidation looks unrealistic. Today, subsidies account for 42% of gross fiscal deficit, exactly twice as many times a decade ago. Therefore, high rate of interest will further put pressure on real estate sector.

• Exit of foreign funds

Foreign private equity funds invested over $20 billion into Indian real estate during 2006-13. After 7-8 years, these funds are reaching their end of term and, so, would have to sell their holdings. Again, this will put pressure on real estate sector and developer might be forced to lower the prices.

When would prices start depreciating?

We predict from November-December 2013 onwards, the prices might start to come down. With festive season of Diwali behind and an eye on elections, funds will move away from real estate sector and that is the time when one can expect price fall.

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