Latest Knight Frank Report Reveals $0.62 Trillion Worth of Investment Opportunity in The Indian Affordable Housing Market

Investment Opportunity

The progress in the affordable housing sector has caught a lot of investors’ attention, and it’s for good reason. Though the COVID-19 pandemic had slowed down the growth of the affordable housing sector in FY2020, the sector has again caught pace. The same has been made evident in the latest report published by Knight Frank India, where the real estate consultant has revealed that the affordable housing market has an investment opportunity of $0.62 trillion.

The investment opportunity that is offered by the real-estate sector is huge. If we talk about only the affordable housing sector, then it is not any different. The report titled Brick by Brick – Long Term Capital to Fund Affordable Housing For All was recently published by Knight Frank India. The report has a thorough analysis of the sector. One of the major highlights is an increase in the level of private equity investment in the affordable housing sector.

The total private equity investment in the real estate sector has totaled $2,597 million in this decade alone. Out of this, approximately 17% has already been allotted to the affordable housing sector. Even though the COVID-19 pandemic slowed down the entire market, the first quarter of 2021 had a quick bounce back. The private equity investment touched the mark of $107 million, gaining 29% as a share in the real estate sector.

Understanding that the investment opportunity is pretty huge, Knight Frank has made a conclusion out of many that there would be a lot of opportunity for private funds. If we consider the residential sector as a whole, then the private equity investment stood at $368 million in the first quarter of 2021. The reason why there is a lot of potential in the market is that the government has pushed for it during its tenure. The attempts are still being made to fill the demand gap in the Indian market.

Taking the private investment perspective forward, the fluctuations have been visible in the last three years excluding the first quarter of 2021. The year 2018 has had the best share of 40% private equity investment of $831 million.

The following year witnessed a dramatic downfall to 25% with only a $343 million private equity investment. The next five years, however, appear to be the brightest of them all. The opportunity of $0.62 trillion offers a lot of thoughts about how high the affordable housing sector will go.

The sky is the limit despite the sector witnessing its worth records in 2020. The pandemic and market shutdown attributed a lot to the figure of 12%. With everything coming back to normal, the private equity investment seems to be very well in its place.

Knight Frank has also finally noted that even though the sector stands at 17% of the total housing market, there is no doubt that the affordable housing market would take a huge jump in terms of investment opportunities.

The Demand

Calling the residential market in India a hype must be the last thing for every investor. If we stick to the facts, then it becomes more obvious that the current housing gap would be fulfilled with a surplus to be made available for any increase in the estimate that may occur. The global housing need gap has an 11% of share in India’s name. This makes the number stand at 35 million homes. This is the exact gap that India is looking to fill in the upcoming years.

Ministers have stepped in along with the credit providers to ensure that there is no stone left unturned to meet the demand. The urban areas have a decent number of populations. The percentage is only expected to go up as more and more residents from rural areas migrate to urban areas in search of a decent occupation. The Ministry of Housing and Urban Affairs estimates that 40% of the population in India will reside in the urban area by 2030

A goal of 11.2 million houses has therefore been set. As a result, $1,662 million worth of funds have been invested in the housing sector in the last three years. The investment came in despite the slowdown in the market.

The support is from every corner. HDFC Capital Advisors, or HCARE, has extended its support to offer credit to credible builders. In a similar bid, it has already raised $1.1 billion worth of funds. HFDC Capital Advisors would alone offer long-term financial support across 20 major cities.

The effects of migration are expected to be mitigated with more credit providers following a similar suit in the future, with most of them already extending their credit facilities exactly like HDFC Capital Advisors. The objective of HCARE is to assist in building 1,71,000 homes while developing a total area of 180 million square feet.

HFDC Capital Advisors would leverage asset management to hedge the risks involved in the affordable housing sector. It must be noted that the credit facility comes into the picture only after a thorough scrutiny of the credibility of the developer. The liquidity or credit facility will be extended only if the status of the builder is credible on paper.

The global residential gap of 325 million homes is still a huge number. India contributes approximately 11% of it. With sufficient credit supply facilities coupled with enough private equity investment, not just the number would be achieved but also the investment opportunity gets more strength in the global market.

Adaptation of PMAY

While every participant gets its due credit for making a valuable contribution, the government often lags behind. The formation and implementation of the policies is a journey in itself. One such policy that needs to be discussed is The Pradhan Mantri Awas Yojana, also known as PMAY.

The tide changed its course in 2014. With the formation of a new government, the objectives related to the housing sector changed. The growing demand for residential accommodation came to notice of the relevant ministries. This led to the adaptation of PMAY in 2015. PMAY answered basic, yet important, calls to fill the housing gap in India. It took up the responsibility to fulfill the demand of 11.22 million homes. The policy sparked a major highlight after it sanctioned the construction of 11.3 million affordable housing.

Out of all the houses that have been sanctioned, the construction of 4.8 million houses has already been completed. The delivery has taken the investment opportunity in the affordable housing sector a step forward. It is not just about committing a specific number. With the deliveries already in place, it signals an okay to go board with a guarantee to receive returns.

The policy formulated by the government is clearly intended to meet the rise in the demand for residential accommodation in urban areas. We reviewed in the previous section how an increase in migration poses a challenge for builders, credit providers, and the government. The PMAY is said to have taken a clear hint from this challenge to fulfill all the demands.

Gulam Zia, a Senior Executive Director of Research, Advisory, Infrastructure, & Valuation at Knight Frank India, summarised all the details by saying that the increase of private equity investment in the affordable housing sector signifies the potential that it holds in the market.

It is a clear shot that the objectives will be met. The growth is already in place, exactly where it should be, however the future still holds a challenge. It is on different lines, but it must be looked upon. It would be extremely critical to reduce the reliance on subsidies while tackling the issues like sale market, leasing market, project finance, the development market, and housing finance market. For now, the investment opportunity of $0.62 trillion shines brighter than any star in the sky.