Affordable Housing Struggles: High Costs and Low Margins Reshape Real Estate Market
Sales of affordable homes have drastically dropped to just 18% of total sales in 2024, a significant decline from 38% in 2019, according to Anarock Property Consultants. The challenges faced by private developers are reshaping the real estate landscape.
Affordable HousingReal EstateDevelopersGovernment CompaniesHousing MarketReal Estate MumbaiJan 20, 2025
This shift leaves the ground to government companies like NBCC and state-level players in tier II and III cities.
Signature Global, a Gurugram-based developer that initially championed affordable housing, has not launched a single such project in the past two years.
Pradeep Aggarwal, founder and chairman of Signature Global, explained, “High land costs and increasing construction expenses have made it difficult for private developers to sustain operations without compromising on quality.”
Prestige Estates, which had a joint venture for affordable housing with HDFC Capital, also abandoned its plans after the first project due to thin margins of only 10-15%.
In contrast, premium projects offer margins of 20-30% or even higher.
Sanjay Dutt, MD and CEO of Tata Realty & Infrastructure (TRIL), highlighted another major challenge “Taxes and delays in securing permissions make affordable housing projects too expensive for developers.
State governments are caught in a dilemma they want affordable housing for political votes but also want developers to fund these projects.” While Tata Value Homes pioneered low-cost housing, TRIL has shifted its focus mainly to commercial properties.
The limited incentives for private players create significant barriers to scaling affordable projects, according to Pradeep Aggarwal.
Industry players report that land rates have increased by over 40% in the past few years, making it even more challenging.
Sales of affordable homes, defined as those priced up to Rs 45 lakh and up to 60 square metres, plunged to just 18% of total sales in 2024, down from 38% in 2019, as per Anarock Property Consultants.
In terms of supply, the share of affordable housing in the top seven cities decreased to 16% of the total supply, down from nearly 40% in 2019.
Private developers are questioning the official definition of affordable housing, especially in cities like Mumbai, where a home priced at Rs 45 lakh is practically unattainable.
Anuranjan Mohnot, founder and MD at Lumos Alternate Investment Advisors, stated, “It’s impossible to buy a home in Mumbai for less than Rs 1 crore, so a home for Rs 45 lakh is out of the question.” He suggested raising the cap to at least Rs 1 crore for cities like Mumbai, as rates in areas such as Kalyan have reached Rs 10,000 per square foot.
State-level developers are still investing in affordable housing, although in two distinct categories.
The first type constructs around 200 to 300 units, while the second type builds fewer than 50 to 60 units.
Anuj Puri, chairman of Anarock, believes that bringing back incentives and tax breaks, such as the “100% tax holiday” under Section 80-IBA of the Finance Act, 2016, could help reinvigorate the affordable housing sector.
Monu Ratra, executive director and CEO at IIFL Home Finance, pointed out that there are no government subsidies available for developers in this segment.
Both banks and developers prefer properties with larger ticket sizes that offer higher profitability.
“Similarly, large developers prefer the premium segment, which has fewer customers but much higher margins,” Ratra said.
Frequently Asked Questions
What is the current definition of affordable housing in major cities?
Affordable housing is defined as houses priced up to Rs 45 lakh and up to 60 square metres in major cities.
Why are big national developers moving out of the affordable housing market?
Big national developers are moving out due to high land costs, increasing construction expenses, and thin profit margins, making it difficult to sustain operations without compromising on quality.
Which government companies are still active in the affordable housing sector?
Government companies like NBCC and state-level players in tier II and III cities are still active in the affordable housing sector.
What are the main challenges faced by developers in the affordable housing market?
The main challenges include high land costs, increasing construction expenses, taxes, and delays in securing permissions, which make the projects too expensive for developers.
What incentives are developers asking for to reinvigorate the affordable housing market?
Developers are asking for incentives and tax breaks, such as the '100% tax holiday' under Section 80-IBA of the Finance Act, 2016, to be brought back to reinvigorate the market.
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