There’s a lot of focus today on affordable housing due to various government-backed schemes and incentives. In fact, Home Loans have become cheaper as well. Therefore, it’s probably a good time to ask ourselves if affordable housing is a good investment option.
In the 2017 Union Budget, affordable housing was given the “infrastructure” tag, which comes with its own benefits. The businesses supplying affordable housing can now get cheaper loans from banks as well as tax concessions and foreign funding, all of which are important when it comes to boosting India’s infrastructure sector. With this move, the government aims to give the infrastructure sector a massive fillip.
There will be many property buyers looking at affordable housing not just for residential occupation, but as an investment avenue. If you happen to be one of them, now is the time to analyse if affordable housing is a viable investment option.
New Initiatives To Boost Housing
A few new initiatives have been taken by the union government during the Union Budget with regards to affordable housing:
- Apart from the ‘infrastructure tag’ to the affordable housing sector, allocations to various housing schemes have been increased. The Pradhan Mantri Awaas Yojna scheme has increased its budget from Rs. 15,000 crore to Rs. 23,000 crore for 2017-2018—an increase of more than 50%.
- Developers complain about the high interest rates they pay on their borrowings for real estate projects. The infrastructure tag will help builders and developers borrow at lower rates.
- There will be an interest subsidy of 3% on Home Loans of up to Rs. 12 lakh, and 4% subsidy on loans of up to 9 lakh. Persons earning less than Rs. 6 lakh per annum can avail this subsidy. This step is bound to help people from the low and middle income classes to purchase homes.Today, a person earning Rs. 6 lakh can borrow around Rs. 20-30 lakh at best. This range constitutes about two-thirds of the Home Loans disbursed by banks. Hence, the industry expects these steps to fuel growth in the currently subdued housing sector.
- To further boost investment in housing, the tenure for long-term capital gains has been reduced from three years to two. Hence, if you buy affordable housing for investment purposes, you can sell it after two years and still claim long-term capital gains, which has indexation benefits to reduce tax incidence. This will encourage more people to look at property as a medium-term investment option.
What Investors Need To Consider
Let’s look at some factors that determine the potential of returns from a housing investment.
Since this investment option involves very large sums of money, it is advisable to analyse all risk/reward factors before committing yourself.
- Location: This is the most important factor in real estate investment. Buy at those locations where there is a prospect of growth in the near future. You may have to pay a premium for top locations, but the returns should compensate your risk.
- Infrastructure: Well-built infrastructure near the property is essential for price appreciation. Infrastructure such as roads, availability of water and power, hospitals and schools etc. are factors that attract resale buyers. While hospitals, schools, and other amenities may take time to come up, basic essentials like power, water, and roads must be in place.
- Smart City Tag: Finally, cities with the ‘smart’ tag could be a good choice for affordable housing investment. The Government of India has identified about 100 cities that will be developed as Smart These cities have basic infrastructure in place, with a few decades to go before they balloon to the size of some of India’s biggest urban centres. There is huge growth potential in such cities, and therein lies the possibility of handsome long-term returns.
Finally, as with any investment idea, you must hedge your bets. You must invest in a combination of debt, equity, property, gold, bonds, etc in order to form a diversified portfolio, and not put all your eggs in one basket—especially when investing in an option that will cost you millions of rupees.
(The writer is CEO, BankBazaar.com)