Budget 2024: Will real estate developers turn focus on affordable housing after revival of interest subsidy scheme?

Budget 2024 has also brought back interest subsidy under the flagship scheme setting aside ₹4,000 crore for the Credit Linked Subsidy Scheme (CLSS). The revival of the scheme, say real estate experts, is expected to boost affordability of prospective homebuyers and may increase the supply of the affordable housing stock in peripheral locations of Tier 1 and Tier 2 cities recently connected with new infrastructure.

This is what Budget 2024 has proposed for affordable housing

In the Union Budget for financial year 2024-25, PMAY-U has been allocated ₹30,170 crore, an increase of 20.19% from the 2023-2024 budgetary allocation.

According to the Union Housing and Urban Affairs Ministry, the interest subsidy scheme can soon be availed by the economically weaker section (EWS), lower income group (LIG) and middle-income group.

Nearly two years ago, the government did not extend the time period of CLSS under PMAY, which provided subsidized home loans based on income. At present, the scheme is being implemented through three verticals – beneficiary led construction/enhancement, affordable housing in partnership and in-situ slum redevelopment.

Presenting the Union Budget for 2024-25 in the Lok Sabha on July 24, Finance Minister Nirmala Sitharaman said that three crore additional houses under the PM Awas Yojana in rural and urban areas will be constructed, for which the necessary allocations are being made. According to the budgetary document, ₹3,000 crore has been allocated for EWS and LIG groups to construct houses under CLSS in urban areas while the middle-income group will be provided ₹1,000 crore.

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Sitharaman announced central assistance of ₹2.2 lakh crore over the next five years to meet housing requirements of one crore urban poor and middle-class families under the PMAY-U and proposed interest subsidy to provide loans at affordable rates.

Ministry officials have been quoted as saying that modalities of the PMAY-U 2.0 have been worked out and the second phase of PMAY-U will be launched soon.

Under CLSS scheme 1.0 launched earlier, MIG I category consisting of individuals with an annual income of ₹6-12 lakh were given an interest subsidy of 4% provided on a loan of up to ₹9 lakh. For the MIG II category, which was made up of individuals with an annual income of ₹12-18 lakh, an interest subsidy of 3% was given on a loan of up to ₹12 lakh. The benefits were typically in the ₹2-2.5 lakh range. The carpet area of a housing unit was initially revised to up to 120 sq m and up to 150 sq m for MIG I and MIG II respectively in November 2017 and further enhanced to up to 160 sq m and up to 200 sq m for MIG I and MIG II, respectively in June 2018.

Details for CLSS 2.0 have not yet been released.

Revival of CLSS scheme to boost supply of affordable housing stock in Tier 1 and Tier 2 cities

CLSS 2.0, the fine print for which is yet to be released, is an opportunity for real estate developers going forward. “What it does is to bring down the cost of funding as buyers would have to pay less interest on home loans. It will also increase homebuyers’ eligibility to apply for a home loan,” said Vipul Roongta, Managing Director and CEO of HDFC Capital Advisors Ltd.

Most developers have focused on launching luxury housing projects after Covid-19 but that is not to say that the demand for affordable housing has gone down. It is the supply of affordable housing which has decreased because there is greater viability for luxury housing projects. Having said that, it’s not that developers will suddenly change track and start launching only affordable or mid housing segments, he explained.

“I don’t see any reason why both the guns should not be firing simultaneously – affordable and luxury. Going forward, I see supply for affordable housing definitely going up in a big way.”

Much of this affordable housing supply may come up along new infrastructure corridors such as highways, RRTS and the Metro.

One big positive in the Indian context is that road and metro connectivity in all the top cities has significantly gone up. Several affordable housing projects may be launched within 45-minutes of the Central Business Districts in major cities. That will be because land prices in these zones will be more compatible to construct affordable housing.

“We may see a lot of action in areas along the Yamuna Expressway, Sonipat, Panipat, Manesar, Meerut, Nasik, Nagpur, Panvel, Mysuru and other peripheral areas in big cities among others,” he said.

Developers’ decision to launch projects will depend on the cost at which they bought the land, the cost of construction and the cost of FSI.

“Tier II and III cities will become the nerve centres of a lot of development and see growth in the affordable and mid segment housing,” said Boman Irani, president, CREDAI, however adding that the government should make size, as opposed to price, the indicator of affordable housing.

Real estate experts said that developers that were primarily into affordable housing and changed track to launch premium housing may also decide to launch projects in this segment again.

Success of the affordable housing scheme depends on steps taken by the state governments

The government’s decision to bring back the interest subsidy under the Pradhan Mantri Awas Yojana (Urban) 2.0 and set aside ₹4,000 crore for Credit Linked Subsidy Scheme (CLSS) is a positive step, experts said.

They pointed out that the success of this scheme depends on the affordable housing schemes that are eventually rolled out by the respective state governments as land is a state subject.

“It may be worthwhile to set aside agricultural lands along newly built infrastructure as residential for the purpose of affordable housing where the size of homes could be defined by the government,” they said.

Pradeep Aggarwal, founder and chairman, Signature Global (India) Ltd, a company that pioneered affordable housing in Gurugram, is of the opinion that the government’s decision to reinstate the interest subsidy under the Pradhan Mantri Awas Yojana (Urban) 2.0, along with the ₹4,000 crore allocation for the Credit Linked Subsidy Scheme (CLSS), marks a significant and welcome step. This initiative, coupled with the construction of three crore additional houses in rural and urban areas, underscores a strong commitment to making homeownership more accessible for many families.

“The collaboration between the central and state governments in promoting affordable housing will be crucial for the success of this scheme. We request that agricultural lands be strategically utilized along newly developed infrastructure for residential purposes. As a developer, we can ensure the effective implementation of these projects, providing quality and affordable homes to those who need them most,” he said.

Pankaj Kapoor of Liases Foras said that the demand for housing priced less than ₹45 lakh has reduced over the years. It constitutes just about 10 to 15% of the total housing units sold. In 2017-2018, Tier 2 cities contributed to close to about 30% of affordable housing demand which is down to almost 20% today. “The renewal of the CLSS scheme would mean revival of affordable housing in peripheral areas of Tier 1 and in Tier 2 cities, especially those located along the new and upcoming infrastructure in the next two to three years,” he added.

Also Read: Luxury homes above ₹1 crore witness 41% growth in sales; affordable housing sales decline

According to a report by property consultancy Knight Frank India, the budget housing segment across the top eight cities in India, comprising residential units priced under ₹50 lakh, has seen a sustained deceleration in sales for the past five consecutive half-yearly periods.

“I don’t see a shift in the focus of developers who are present in the luxury segment for higher margins,” said Saandip Kundu, CEO, RMZ Living. However, the affordable housing segment is expected to grow parallelly, driven by players who have been active in the segment so far, he added.

Others agreed. “Players in Tier 2 and 3 cities whose core expertise lie in the semi-affordable segment are likely to account for this anticipated growth,” said Ritesh Mehta, Senior Director, and Head (North and West), Residential Services and Developer Initiative, JLL India.

Also Read: Affordable housing launches drop 21% in April-June period across 7 major cities as builders focus on premium units

Byproduct of fillip for rental housing

Interestingly, the Modi 3.0 government also unveiled plans to facilitate rental housing for industrial workers in partnership with the private sector.

“Rental housing with dormitory type accommodation for industrial workers will be facilitated in PPP mode with VGF (viability gap funding) support and commitment from anchor industries,” Sitharaman underscored.

This may be a sweet spot for both parties in the equation. Several sectoral experts believe that this could be a pilot, which if proven successful, may unlock massive opportunities for real estate developers across the country. Realty players eagerly await a fine print of the plans to assess the potential of this model.

Also Read: Budget FY25: Govt to facilitate rental housing for industrial workers, encourage states to moderate stamp duty rates

“If this works well, then who knows, this may expand on public-private partnership to bring affordable housing on rental basis to larger cities, urban areas,” said Anuj Puri, Chairman, ANAROCK Group. He emphasized that the said move may be the start of a much bigger opportunity where developers may benefit over a period of time if the experience goes well.