Why invest in Low Income Housing?

Real Estate sector is the backbone of the Indian economy, contributing ~10% of the GDP. The housing sector alone contributes 5 – 6% to the country’s GDP. Real Estate is the 2nd largest source of employment in India. Market size of the Real Estate sector is expected to touch US$ 180 billion by 2020 from USD 121 billion in 2013, growing at a CAGR of ~6%.

Real Estate comprises of four broad sub-sectors – residential, retail, hospitality and commercial. Residential Real Estate is the most attractive of all these sectors because of a huge secular demand in the segment. Several factors such as population growth, migration, urbanization, nuclearization, income growth drive this secular demand.

Residential Market can be further divided into three broad categories – Low Income Housing, Middle Income Housing and Premium Housing. With home pricing outpacing the rate of inflation, premium tier 1 houses have become unaffordable, thereby creating a strong demand for affordable homes. Indian culture promotes the idea of owning a home. Even the lower income group prefers owning a house instead of renting one. This is an important determinant for affordable home supply.

LIH-pyramid

Sweet Spot of Indian Residential Real Estate Market – Low Income Housing (LIH)

Housing shortage for Low Income Groups (LIG) stood at 7.41 million units in 2012, accounting for ~40% of the total housing shortage, according to NHB. Although, shortage for Economically Weaker Sections (EWS) accounts for 56% of the total shortage, EWS housing projects are difficult, perhaps impossible, without the Government intervention. Low Income Housing on the other hand enjoys the benefit of a huge secular demand while being possible commercially in the outskirts of cities.

The huge supply demand gap in the segment ensures fast sales velocity and therefore fast exits for the investors. Nearly 70% of the total supply of Low Income Units launched in the two six month periods of June ’11 – Nov ’11 and Dec ’11 – May ’12 was reported to be sold within the period, according to a report – “State of low income housing” by Monitor Deloitte. Low Income Housing, therefore, lies in a sweet spot in the Indian Real Estate Market with low risks and attractive returns.

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