Affordable Housing Woes Mount; Affordable Housing Sales Halve Since 2019, Launches Fall To 16%

[00:00:09]Welcome back. You're still tuned into Halftime Report. It's time to focus on the affordable housing segment. The sales in the segment have been declining. Uh the affordable housing launches have also declined in 2025. To understand what the industry is doing, how they're navigating the challenges, and what the real ground reality is, we are joined by Prashant Thakur, ED and Head Research and Advisory at Anarock.

[00:00:30]We also have with us M. Karthik, Senior VP and Co-Group Head Financial Sector Ratings at ICRA, to understand the lenders' perspective as Gentlemen, good afternoon. Thank you so much for joining us. Uh Prashant, let me start with you first up to understand what the ground reality is looking like.

[00:00:45]The conversations that we've had indicated that affordable housing is going through one of its worst phases when it comes to sales and launches. Can you give us a sense in terms of numbers, how has the performance been, and is it a builder-led problem or a buyer-led problem?

[00:01:01]>> Yeah, it's you know, no doubt that last 3 years we have seen a phenomenal growth in overall residential real estate, but it came at a cost of affordable housing.

[00:01:11]We saw a K-shaped recovery where, you know, upper segment really did well, and affordable, which accounted for almost 45% in in 2019, uh by the end of 2025, its share was, you know, hardly 30 to 40%. So, that's that's the sad story, you know, that has played out unfortunately.

[00:01:29]And you know, it's it's kind of more of a structural problem that I would say.

[00:01:33]The definition of affordable housing is a kind of quite outdated in terms of today's context.

[00:01:38]And uh you know, affordable housing has a very limited uh capability to absorb shock.

[00:01:44]And uh what we have seen uh during these disruptions, which was, you know, uh caused by uh the war uh and then, you know, various other disruptions in terms of tariff, the ability to absorb cost was quite limited for this sector. And also after pandemic what we have seen is that the preference for larger houses was was quite significant and that's where the developer focused on coming up with the launches.

[00:02:10]And couple of factors which includes uh steep land prices uh that that you know the developers acquired land at the increase in construction cost and also in the demand side if you notice the buyers of affordable segment comes from I would say unorganized sector. So for them credit availability in this scenario becomes a challenge. So I would rather say uh in spite of overall sector doing quite well, affordable has lagged because of structural challenges and its ability to absorb shock is very limited.

[00:02:44]>> Okay, structural challenges and the segment is unable to absorb challenges and shocks that we're seeing. Uh Mr. Kartik, let me come to you because your report says that there is moderation but there's been decent growth. So the it really doesn't match the commentary that you are giving and what Prashant is saying. Can you explain what your report suggests?

[00:03:05]Are you seeing green shoots? Is it in projects which does not match the definition because that also is outdated. Give us more sense of what you are seeing on ground.

[00:03:16]>> Sure, good afternoon.

[00:03:17]Uh you know, from an affordable housing entity perspective, right? So we're looking from a financiers.

[00:03:24]They specifically focus on tier two, tier three locations and so on. So data that the data that we see in general from a real estate point of view does not get into so much granularity.

[00:03:35]So from an affordable housing financial perspective about you know, 50 to 80% of their exposure is towards semi-urban and rural locations, right?

[00:03:45]Depending on what the entity that we see. And a sizeable portion of you know, the funding especially from an affordable housing entity perspective, about 40% of the funding goes towards uh you know, self-construction.

[00:03:58]When I mean self-construction is the the the borrower, you know, constructs his his own house. He has a land, he just uh borrows and constructs the house.

[00:04:06]All of this does not get captured in the broader scheme of data which which comes out from a you know, housing sales perspective, which is more organized, if I have to put it from a market perspective. So, this is where the divergence comes in. Uh we expect the segment to grow at about 20% while you see the organized uh uh you know, part of this business, which is you know, sub- I mean, somewhat primer kind of a product, you will see a much slower growth of about 12-13%. So, the divergence is essentially the nature of product that is getting financed in the target borrower segment, which is the financial's target, vis-a-vis what is available at a headline uh you know, uh sales data level.

[00:04:43]>> Mhm. Uh Karthik, I just want to understand, right? Uh are banks actually becoming more cautious also uh on the lending towards lower-income borrowers? How is that also, if you could help us understand that also?

[00:04:59]>> Banks have a larger play in the prime segment, which is uh you know, 25-30 lakh average ticket size. And we have a clutch of uh housing finance companies which do operate in this space.

[00:05:09]When I say affordable housing entities, these are entities who have an average ticket size of about 10-15 lakhs.

[00:05:15]Right? So, so this forms about uh you know, close to about 15-18% of the total housing finance company market. When I say housing finance company, it's only the non-banks.

[00:05:26]In the broader scheme of the housing market, which is close to about 40-45 lakh crore, uh you know, the affordable housing finance accounts for only about 1 and 1/2 lakh crores. So, it's a very small uh segment at this point in time in how we define affordable housing. And the growth on this very small base has been quite high. And then and then healthy at 20% >> Mhm.

[00:05:49]Uh >> Prashant you know you spoke about it that how affordable housing you know the definition is quite outdated as well and we understand that you know industry also wants affordable housing that cap to be raised also. Your thoughts on that and you know what will it mean also in terms of EBITDA margins? Are they normally affordable housing has thinner margins versus premium?

[00:06:12]>> To answer the first part of your question yes the definition needs a reset.

[00:06:16]Today affordable housing as per definition is still capped at 45 lakhs and below.

[00:06:23]And this definition was set I think almost 6-7 years back and after that we have seen a huge run up in the cost and then you know it doesn't make sense to start get stuck at 45 lakhs. So in my opinion and the recommendation that we have been making is that at least for tier one cities the definition should be increased to at least 85 lakhs to 90 lakhs. So that would bring lot of inventory under the fold of affordable housing and would classify for 1% GST and other subs that the sector would get.

[00:06:53]The second part of the question that you asked is whether the margins are thin.

[00:06:57]Yes affordable housing operates on a wafer thin margin and that's where I say that the ability to absorb shock is also limited and coupled with a very wafer thin margin makes this product very unviable for developer in today's scenario where your construction cost has gone up by 10-15% and land prices have shot up and there is highly you know uncertain environment that they are operating in. Your approval takes almost two years to two and a half years depending on what kind of land parcel you're considering. So overall if you think of these variables in today's scenario even if the developer wants to come up with affordable housing he is constrained by lot of structural challenge that he is facing.

[00:07:41]>> Got it. So there are structural issues.

[00:07:44]First, the definition needs to see a change considering the issues that we are seeing right now. And wafer thin margins for developers, that's not working for them. Karthik, from a lender's perspective, do you think it's profitable to lend to the affordable housing segment? How does it differ versus the developers POV?

[00:08:04]>> It's an extremely, you know, a profitable business and a very attractive proposition from a lender's point of view.

[00:08:10]Uh typically, the yields in a in an affordable housing business is is about 300-400 basis points higher than the prime segment. The only difference is that the cost which comes with this is also higher. And affordable housing entities make a fairly decent I mean, their industry level ROAs are about 2.8-3%.

[00:08:30]While the you know, conventional housing finance companies will operate at about 1.8-2% ROA. So, it's a it's a it's an extremely profitable business to to work with. Uh credit cost is something that we have not seen a full cycle because that's I mean, the segment has grown so fast that the seasoning in the in this business has been low. Uh they have tried to keep the credit cost very close to the in the prime segment. So, that's something that we will watch out very closely because the segment has not seen very I mean, too much of cycles like a prime segment. But otherwise, it's a very very profitable business from a lender's point of view and that's why we see a lot of you know, housing finance companies getting into this segment.

[00:09:09]It's a different segment to operate with vis-a-vis their conventional prime you know, positions. Uh so, they're trying to operate it via you know, a a separate business unit within the larger scheme of things. So, it is a profitable business, but it requires a certain set of skills and also branch infrastructure and people infrastructure which could be different and higher than a conventional housing finance.

[00:09:34]>> Mhm.

[00:09:35]Okay, point taken there. You know, Karthik as well as Prashant, thank you so much for joining us on the show this afternoon. Helping us understand affordable housing, where is that moving given the fall that we've seen over the years. What's happening there is important to understand. So, thanks so much for all that. Okay.