VZCZCXRO1513
RR RUEHAST RUEHBI RUEHCI RUEHDBU RUEHLH RUEHNEH RUEHPW
DE RUEHNE #0493/01 0761131
ZNR UUUUU ZZH
R 171131Z MAR 09
FM AMEMBASSY NEW DELHI
TO RUEHC/SECSTATE WASHDC 5771
INFO RUCNCLS/ALL SOUTH AND CENTRAL ASIA COLLECTIVE
RUCPDOC/DEPT OF COMMERCE WASHDC
RUEATRS/DEPT OF TREASURY WASHDC

UNCLAS SECTION 01 OF 03 NEW DELHI 000493 
 
SIPDIS 
SENSITIVE 
 
STATE FOR SCA/INS AND EEB 
 
E.O. 12958: N/A 
TAGS: ECON EFIN EINV EIND IN
 
SUBJECT: AFFORDABLE HOUSING: A RAY OF LIGHT IN AN OTHERWISE GLOOMY 
REAL ESTATE MARKET 
 
REF: MUMBAI 436 
 
 
¶1. (U) Summary:  After a period of unprecedented growth, the Indian 
real estate sector is in the midst of a protracted slowdown. 
Housing prices are in a phase of adjustment; having been reduced 
20-30% in the major metros, and developers are not sure they have 
yet hit the bottom.  However, a ray of light has appeared that may 
stimulate new construction and new demand: affordable housing.  End 
Summary. 
 
A Once Booming Sector 
----------------------- 
 
¶2. (U) The Indian real estate sector saw enormous growth during the 
last five years. Investors dove into the stock market looking for 
high rates of return and ran up the market capitalization of 
publicly listed real estate developers.  Developers outbid each 
other to increase the size of their land banks and land prices 
climbed to unheard of levels in major metros such as New Delhi, 
Mumbai, Bangalore and Chennai.  Second-tier cities, such as Jaipur 
and Amritsar, also experienced sharp increases in real estate 
values.  In March 2008, BPTP Limited, an Indian real estate company, 
outbid other larger developers to buy 95 acres of land in Noida 
(part of the Delhi National Capital Region - NCR) for USD 1.2 
billion (approximately USD 2,500 per square meter), making it 
India's most expensive land deal.  Then, in May 2008, an apartment 
in one of Mumbai's landmark buildings created a record when it sold 
for approximately USD 2,400 per square foot.  However, as early as 
August, the sector began witnessing its first signs of trouble with 
some developers struggling after a too rapid expansion (reftel). In 
the months since, media have speculated that several developers were 
near bankruptcy, as they had become financially dependent on their 
stock market value or on the continued influx of new buyers to 
support existing construction, not unlike a Ponzi scheme. 
 
¶3. (U) Anurag Kalra, Vice President, Investor Relations of DLF 
Limited, one of India's largest developers, told Econoff by mid-2008 
the sector had become overrun with "fly by night players", prices 
for commercial and residential properties had skyrocketed and 
interest rates were high.  Buyers became cautious and turned toward 
big realty companies like DLF when they made their purchases.  Then 
in fall 2008, when the worldwide economic crisis hit, demand and 
liquidity in India all but evaporated.  According to Kalra, activity 
in the real estate sector has significantly slowed with many realty 
companies in trouble, after massive erosion in their market 
capitalization, and facing a crisis of confidence by prospective 
buyers.  Kalra told Econoff sales of luxury housing are minimal, 
commercial property deals are being deferred, big developers have 
stopped acquiring land and are sitting on huge land banks, and 
companies like BPTP Limited who overextended themselves have asked 
the government to either restructure their deals or let them out of 
the deals altogether. 
 
 
Initial Industry Efforts to Revive Sector 
----------------------------------- 
 
¶4. (U) Kalra told Econoff that to combat the slowdown for existing 
projects both in the commercial and residential sectors, developers 
have tried a series of measures.  First they offered incentives like 
furnished space or free gifts to increase demand and tried 
innovative marketing strategies.  When this failed, developers cut 
prices by 10-15% but even that did not attract buyers.  He further 
related both developers and buyers have adopted a wait and see 
attitude with developers on average only dropping prices by 10-15% 
and the majority of buyers staying out of the market.  Kalra 
believes the reason buyers have held back is because they feel 
prices have not yet hit bottom, and in the case of residential 
buyers, they are also worried about job security.  Kalra said the 
reason developers are reluctant to reduce prices further is because 
of the high cost to develop the existing properties. 
 
¶5. (U) The situation is somewhat different for new residential 
projects that have not been deferred because construction costs are 
down.  This is one of the reasons why, in February, DLF slashed 
prices by 20-30% on two new residential developments it is moving 
forward with in Hyderabad and Bangalore.  Kalra said this seems to 
have finally resonated with buyers, resulting in 50% of the units in 
the two projects being committed already.  However, Kalra believes 
it is too soon to tell whether another price correction will be 
required to sell the remaining units. 
 
 
Government Starts Supporting Affordable Housing 
---------------------------- 
 
NEW DELHI 00000493  002 OF 003 
 
 
 
¶6. (U) The Government of India has recognized the lack of affordable 
housing in India as a serious problem.  According to the Ministry of 
Housing & Urban Poverty Alleviation, India faces a housing shortage 
of 24.7 million with 99% of the shortage affecting the poorest part 
of the population.  The GOI has classified this part of the 
population as the Economically Weaker Section (EWS) and Lower Income 
Group (LIG).  (Note: An EWS monthly family income is approximately 
USD 64 while a monthly LIG family income is between USD 64 and USD 
¶149.  End note.)  To address this enormous housing shortage, the GOI 
has put forth a series of initiatives under the heading "Affordable 
Housing for All" as part of its 11th Five Year Plan (2007-2012). 
 
¶7. (U) The flagship initiative, introduced in 2007, is the 
Jawaharlal Nehru National Urban Renewal Mission (JNNURM).  Under 
this program, approximately USD 4.4 billion was allocated to create 
1.5 million affordable homes in 63 major cities for the EWS/LIG 
population.  Although the GOI has not adopted a formal definition of 
what constitutes affordable housing for EWS/LIG, a special task 
force on "Affordable Housing for All" generally defines affordable 
housing for these groups as a unit with between 300 to 600 square 
feet, with a cost not to exceed four times the household gross 
annual income and the equal monthly installments (EMI)/rent not to 
exceed 30% of the household's gross monthly income.  Under JNNURM, 
the central government partners with States and urban local bodies 
and subsidizes anywhere from 50-90% of construction costs.  Pankaj 
Joshi, Director of Housing at the Ministry of Housing and Urban 
Poverty Alleviation, told Econoff money has been disbursed for 1.3 
million houses which are at various stages of construction. 
 
¶8. (U) Then in February of 2009, the Ministry presented the Interest 
Subsidy Scheme for Housing the Urban Poor (ISHUP), the prime 
beneficiaries once again being the EWS/LIG.  Under this program, the 
central government will provide subsidies on loans of up to USD 
2,500 for a total of 400,000 homes.  Also in February, the GOI 
announced another USD 1.2 billion had been set aside for the 
construction of an additional 1 million affordable homes.  Director 
Joshi told Econoff that this money will be spent on Public-Private 
Partnership projects with the central government's money going 
toward paying up to 25% of total infrastructure costs.  The 
beneficiaries of this initiative include not only the EWS/LIG, but 
also the middle income group (MIG) and includes building housing 
units up to 1,200 square feet.  A requirement of the program is that 
developers must set aside 25% of the development for EWS/LIG 
housing.  Joshi noted the initiative is so new that all the details 
have yet to be worked out, but should be finalized by the end of 
March. 
 
¶10. (U) Prior to the slowdown, developers had focused on commercial 
properties and/or high-end housing.  However, a recent Federation of 
Indian Chambers of Commerce and Industry (FICCI) survey on the 
"Impact of Global Financial Crisis on Indian Real Estate Market" 
indicated that developers have finally recognized affordable and 
mid-range housing as areas of opportunity because of the dearth of 
low cost units.  Mausami Roi, FICCI's Joint Director of the Real 
Estate Section, called affordable housing the one ray of light in a 
troubled sector.  Babu Khan of the Confederation of Indian Industry 
(CII) echoed this sentiment.  However, they both agreed that 
developers would likely focus first on mid-range housing because, to 
make a profit, units would have to be sold for between USD 25,000 
and 50,000.  Econoff asked DLF VP Kalra if DLF intended to enter the 
affordable housing market.  He said it was likely but not in the 
immediate future.  For the present, DLF intended to stay focused on 
its current projects. 
 
¶11. (U) In January, government-owned State Bank of India lowered its 
interest rate on home loans of up to USD 50,000 to 8%.  Other 
state-owned banks have been mandated to offer home loans at 8.5% for 
loans up to USD 10,000 and 9.25% for loans up to USD 40,000. 
According to FICCI's ROI, it is too early to gauge the impact the 
lower interest rates may have made, though she was hopeful they 
would lead to more buyers in the market.  Neither ROI, CII's Khan, 
or DLF VP Kalra would say exactly when they thought the market would 
turn around, though they all believed the fundamentals of the sector 
were positive.  They all hoped to see movement by the end of the 
year but when pressed said a real turnaround before 2010 was 
unlikely. 
 
 
Real Estate Sector Seeks Special Status 
---------------------------- 
 
¶12. (U) In addition to looking at affordable housing, the real 
estate industry is trying other methods to revive the sector.  CII 
recently submitted a request to the Ministry of Housing & Urban 
Poverty Alleviation seeking "Industry" and "Infrastructure" status. 
 
NEW DELHI 00000493  003 OF 003 
 
 
The benefits of such special status includes reduced loan rates, low 
collateral levels requirements, fiscal incentives, access to 
subsidies, the raising of external commercial borrowings (ECBs), and 
tax breaks.  CII believes the requested special status would lead to 
increased investment, create demand in the sector, and increase 
employment and overall growth in the economy. According to Director 
Joshi, the Ministry told CII that they must decide if they want 
"Industry" status or "Infrastructure" status because they can't have 
both.  Joshi also said it was unlikely that any decision on granting 
special status would be made until after the new government was 
formed. 
 
¶14. Comment: (SBU) Low interest rates on loans up to USD 50,000 
coupled with the GOI's latest initiative on affordable housing could 
be the medicine India's real estate sector needs.  If that fails, 
however, developers may find themselves in the position of having to 
slash prices even further and the GOI may have to grant special 
status to help the ailing sector. 
 
WHITE