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Affordable Rental Housing: Addressing India’s Urban Housing Crisis

Housing

India has been witnessing rapid urbanization in the last 15 years. According to estimates every minute 30 people migrate from rural to urban India. In 2011, 30% of India’s population lived in urban areas. By 2030, this percentage is expected to go up to 40% and the number of people living in India’s cities is expected to reach a whopping 630 million. 

This pace of urbanization poses a challenge to the urban local bodies and to governments across various facets such as housing, demand on energy utilities, climate impact, security & crime rates, public health systems etc. Of all of these, adequate and decent housing for everyone remains the foremost requirement.

Housing Policies – Ownership versus Rental

Through the years, the Government of India has been providing many schemes which provide sustenance-level facilities to the Economically Weaker Section (EWS)/Low Income Group (LIG) population. 

To solve the housing shortage, several schemes have been in place at different points in time. While these policies have had their share of successes there have been several challenges as well. The latest housing policy, the Pradhan Mantri Awas Yojana – Urban (PMAY-U) was launched in 2015. The scheme aims to provide a pucca house with basic amenities such as electricity, water, and sanitation to all eligible urban households by 2022. The scheme has an estimated demand of 1.12 crore houses. As per the Ministry of Housing and Urban Affairs’ dashboard, 45 lakh houses have been completed as of date. 

While most of the historical housing policies as well as PMAY(U) have largely been targeting home ownership, the government has come to the realization that even with all the incentives provided, most of the urban poor cannot afford to buy a house.  Affordability is not just the upfront cost of buying a house or availing a loan. Affordability must be measured by the operational expenses of living in that home, travel expenses of commuting to work, and the cost of accessing other social infrastructure such as hospitals and schools. 

Globally, many countries have recognized that home ownership at the unskilled/semi-skilled level is not the ideal solution to their housing troubles. It is important to develop a vibrant rental market for the following reasons – 

  1. Home ownership leads to urban sprawl. Most workers purchase a home which is situated in the outskirts of the city due to the unaffordability of real estate in the core urban areas of any city. However, avenues for employment are almost always situated in the core urban areas. Working far away from home adds significant cost and time for the workforce, not to mention the added congestion on the public transportation system. A well-developed rental ecosystem can address this issue by allowing workers to rent houses near their workplace, thereby, increasing efficiency and productivity
  2. Rental markets improve worker mobility. In the case of the blue-collar workforce, employment opportunities can keep shifting across localities within a city or even between cities. It is much simpler to move between rental homes than from an own house, which serves as a tether to one micro-market. 
  3. Rental houses can provide shelter to those families which cannot afford to purchase a home as their income level may not be sufficient to make a down-payment or to pay monthly installments. Most of the unskilled/semi-skilled workforce also works in the ‘informal’ economy or are thinly banked and might not be able to show sufficient formal records to avail a loan.  

Developing a well-functioning affordable rental housing is a highly feasible solution to the urban housing crisis. 

Affordable Rental Housing Complex (ARHC) Scheme 

The Government of India launched the Affordable Rental Housing Complex (ARHC) scheme in June 2020. The scheme aims to provide decent rental housing for the urban poor near their work sites. The scheme intends to benefit multiple stakeholders including the dwellers, the developers, and urban local bodies. 

ARHC

The primary beneficiary of the scheme is the EWS/ LIG segment. These include urban migrants such as semi-skilled/unskilled labour, street vendors, industrial workers and people employed in services such as in hospitals, hotels, and educational institutions.

The scheme is being implemented via two models. Both models have a concession period of 25 years and most terms and incentives are the same.

ARHC

 

In both models, the initial rent will be decided by the Urban Local Body after conducting a survey of the prevailing rental rates in the surrounding areas. The rent can then be increased 8% biennially by the concessionaire. 

Model 1 - Repair, Develop, Operate and Transfer

The main intent behind Model 1 is to use a significant number of vacant houses which were created under previous government housing schemes such as the Rajiv Gandhi Awas Yojana (RAY) and Jawaharlal Nehru National Urban Renewal Mission (JNNURM). As per the Ministry dashboard, there are ~88,000 such vacant houses available across 13 states/UTs in India. The concessionaire will have to undertake repair and retrofitting of these houses to make them suitable for dwelling. 

Model 2 – Construct, Develop, Operate and Maintain

Model 2 of the scheme is aimed at providing decent accommodations to people working in factories, manufacturing plants, industrial parks, business parks, hospitals, educational institutions, hotels, malls etc. 

Under most of the above-mentioned verticals, the business owner/developer will have a portion of the land vacant within the premises (whether it is a factory or a hospital or a university). The scheme is intended to encourage the development of dwelling units in these portions of vacant land which can then be used to house the workers who are working in that facility. This is intended to have a dual benefit to both the employers as well as the workers. 

The workers will be provided decent housing near their workplace, which will ensure better productivity and efficiency. 

The employers/owners of the land will be optimally utilizing vacant land parcels within their larger facility and earning a rental revenue stream. By registering these dwelling units as an ARHC with the Ministry of Housing & Urban Affairs, they will also benefit from the multiple incentives such as –

  1. Exemption from income tax on any profit/gains from operating these ARHCs
  2. Inclusion of ARHCs in the Harmonized Master List, leading to priority sector lending (PSL) rates
  3. 50% additional FAR/FSI free of cost
  4. Necessary trunk infrastructure will be provided by the state/UT at no cost
  5. Municipal services will be levied at residential rates instead of commercial
  6. Rent or sell permissible commercial built up area
  7. ‘Use Permission’ changes for houses on vacant land by state/UT

While the onus of creating occupancy in the housing unit will rest with the developer, there can be strategies to minimize this risk – such as tying up with tenants in an industrial park to hold a certain number of houses for their workers or tying up with aggregators to publicize the availability of rental houses to employers and workers in the surrounding areas as well. 

The developer has the option to design the dwelling units in a fashion that will be most suited to their requirements. The complexes can be a mix of 2-bedroom units, 1 -bedroom units and dormitories, with the caveat that not more than 33% of the complex be 2-bedroom units. 

To boost the use of innovative construction technologies and sustainable building materials, the scheme has a Technology Innovation Grant built into it. If a developer can showcase that they will be using building materials/ technology that will result in a greener, disaster-resilient building then the developer can avail a grant of up to INR 20,000 per dormitory bed to INR 1,00,000 per 2-bedroom unit. 

This is just the beginning

The launch of the ARHC scheme is the first step in the right direction towards India’s urban housing issue. Providing suitable rental housing to the millions of people struggling to live in India’s cities will be a big contributor to Hon’ble Prime Minister Modi’s ‘Housing For All’ Plan. The Union Budget 2021 has extended the scheme timelines to 31st March 2022 to continue providing incentives to various stakeholders for another year. 

The rental housing market in India is at a nascent stage due to a variety of reasons such as low rental yields, lack of a regulatory framework to formalize rental housing, old rent control acts, inequal landlord-tenant equations, lack of formal grievance mechanisms and no rental housing industry bodies. Most of the developed economies such as USA, Europe, Singapore etc. have a mature rental housing market and India (both government and private) will need to study various models to arrive at the solution that suits India’s purposes and diverse requirements. 

Developing a fully functional rental housing market will need full-fledged participation from the private sector and institutional investors. The ARHC scheme is a good stepping-stone for employers to start providing rental housing to the people working in their facilities. By participating in the scheme, the market will be initiated and supply and demand for affordable rental housing can be evaluated better in the upcoming iterations of the scheme. 

Complex issues need multi-faceted solutions

Affordable housing, including affordable rental housing, is a global requirement and many countries, both developed and emerging economies, are grappling to arrive at an optimal solution. 

Based on various studies conducted by multilateral organizations and developmental financial institutions such as the World Bank, it has become clear that addressing the housing challenge requires systematic changes at numerous levels. Specific to India, the changes listed below, when implemented, will be a game-changer for the Indian affordable rental housing market- 

  • The Model Tenancy Act, which is currently in the draft stage, will need to be ratified to provide an appropriate rental regulatory framework to protect tenants as well as landlords. 
  • The state governments/UTs/Urban Local Bodies must streamline their regulatory landscapes to accord approvals within the stipulated time. Otherwise, this will lead to time overruns which in turn leads to project cost overruns thereby affecting the affordability for the ultimate beneficiaries. 
  • Private developers should invest in sustainable design concepts to create energy-efficient housing, use technologies such as ‘assemble-at-site’ to reduce construction timelines, use alternative materials and automated equipment.
  • Innovative financing models need to be brainstormed; so that the dependency on priority sector lending is reduced.
  • Employers and developers will need to work out a rent collection model, that will mitigate the risk on the investment made by the developer.
  • Awareness about the scheme and its benefits need to be communicated to all the stakeholders in the ecosystem to derive maximum value from it.

Affordable housing in urban areas is a complex issue. However, an enabling environment can be created with the requisite macroeconomic policies targeted towards social and financial inclusion, infrastructure development and investment. To make ‘Housing For All’ a reality, all stakeholders such as the government (central and state), the employers, the private developers, and the investors need to come together with a common goal of finding the right mechanisms to provide the most basic requirement of life to millions of Indians.