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Housing: Scaling new heights! - Views on News from Equitymaster
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  • May 24, 2006

    Housing: Scaling new heights!

    The Indian housing industry is highly fragmented, with the unorganised sector, comprising small builders and contractors accounting for over 70% of the housing units constructed. The organised sector comprises large builders and government or government affiliated entities. The investment in housing has steadily risen over the plan period. The tenth five-year plan envisages a growth of 381% in the total investment made in the housing segment. Such growth is owing to the shortage of housing in the country.

    The tenth five-year plan on urban development has estimated an additional requirement of about 4.5 m houses each year during the plan period FY02-07. The national buildings organisation (NBO) has estimated urban-housing shortage of 10.8 m dwelling units. With this level of shortage, it is estimated that the urban housing sector alone would require a total investment of Rs 11,567 bn during the next five years. The total fund requirement, including requirement for rural housing would be Rs 16,000 bn, where as total availability is Rs 7,200 bn from the formal sector.

    Growth drivers of housing segment
    Resurgent Indian economy: The Indian economy has made great strides in the years since liberalization in the early 1990s. Industry and service sectors have been growing in importance and now account for 26% and 48% of GDP respectively. Significant changes have taken place during this time. These include liberalized foreign investment and exchange regimes, significant reductions in tariffs and other trade barriers, reform and modernization of the financial sector and significant adjustments in the government's monetary and fiscal policies. These reforms have made India the fastest growing economies in the world.

    Changing Demographics: The middle class segment has gradually increased in the recent years and is spending more on consumer goods. Average income of an urban middle class household is expected to increase to Rs 194,000 by FY10 (Source: DS Kulkarni IPO prospectus). Further, the middle class is expected to account for about 63% of the total urban households by FY10. This, combined with the shrinking size of households (more nuclear families) provides a great source of growth to the housing sector.

    Higher participation from financial institutions: Traditionally, financial institutions used to follow rigid norms in granting loans for housing. However, the scenario is changing gradually. Financial institutions and housing finance companies are offering housing loans with add-on benefits, which include individual accident cover, loan liability repayment and insurance cover in case of death. Further, the low interest rate regime (as compared to the past times) has also propelled increase offtake of housing loans, thus leading to higher demand.

    Shift to larger houses: Rising income levels have increased the aspirations of borrowers to live a better life. This goes with the easy availability of finance and steady real estate prices. Consequently, over the years, there has been a shift witnessed towards larger houses (3 rooms and more).

    Urban All India
    (%) FY81 FY91 FY01 FY81 FY91 FY01
    1 to 1 rooms 45.8 39.5 35.1 45.4 40.5 38.5
    2 rooms 27.9 30.4 29.5 28.6 30.6 30.0
    3 rooms 12.2 14.8 17.1 12.2 13.9 14.3
    4 rooms and above 14.1 15.3 18.3 13.8 15.1 17.2
    All sizes 100.0 100.0 100.0 100.0 100.0 100.0

    Source: Census of India-2001

    Changing profile of developers and builders: The changing profile of developers and builders has also aided the sector's growth. The sector is getting more organised, with a clear focus on building superior infrastructure, using the best quality and the most economic materials. Developers are emphasizing on newer and better designs, with reliable construction management, employing trained professionals to help them implement new projects faster and in more efficient manner.

    While the housing sector has witnessed tremendous growth in the past few years, considering the unmet demand, there still lies a huge potential going forward. The sector has the potential of becoming a strong engine of economic growth because of its high yield on invested resources, a high multiplier effect and a host of beneficial forward and backward linkages in the economy. It is a fact that increased housing activities gives impetus to the economy with enhanced capacity utilization of related industries such as steel, cement and transportation, thus leading to an increase in revenue for the government by way of excise and other taxes.



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