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South Asia Housing Finance Forum, January 27th, 2010
A Market Based Approach to Low Income
Hous ing : Commercial Viabi l i ty of Supp ly
Based on a Project for National Housing Bank, with activesupport from World Bank and funded by FIRST Initiative
Implementation support by IFC and Michael & Susan DellFoundation
Copyright 2009 by Monitor Company Group, L.P.
No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means
electronic, mechanical, photocopying, recording, or otherwisewithout the permission of Monitor Company Group, L.P.
This document provides an outline of a presentation and is incomplete without the accompanying oral commentary and discussion.
COMPANY CONFIDENTIAL
AMSTERDAM
BEIJING
CAMBRIDGE
CHICAGO
DELHI
DUBAI
FRANKFURT
HONG KONG
JOHANNESBURG
LONDON
LOS ANGELES
MADRID
MANILA
MILAN
MOSCOW
MUMBAI
MUNICH
NEW YORK
PALO ALTO
PARIS
SAN FRANCISCO
SO PAULO
SEOUL
SHANGHAI
SINGAPORE
TOKYO
TORONTO
ZURICH
2 0 0 9
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Confidential
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Note: 1Monthly Household Income; 2Affordability defined as households which have EMI / MHI Ratio of 40% of a Home loan which has a 20% down payment onan Home value, EMI level of INR 1,200 per Lac (at 12% interest for a 15 year loan)Source: NHB Trends in Housing; CRIS Infac Report; Monitor Research
Leading developers (DLF, Unitech)
Highly competitive, slowing demandgrowth due to increasing prices and highinterest costs
Price of unit2> INR 25 Lakhs
Potential demand from ~2 M HHswithestimated Market Size:of ~INR 500,000 Cr
Various mortgage finance options availablefor segment
Low Income Housing in India:
A Rs 1,300,000 Cr Opportunity (USD 260 Billion)
Urban Income Pyramid Competitive Highlights
Mostly small / regional developers(Naik Navare)
Major plans / announcements from manylarge players (e.g. Omaxe, Ansals,Lodha, MAYTAS, Purvankara, etc.)
Offering & Market Potential
Price of unit:INR 1025 Lakhs
Potential demand from ~5 M HHswithestimated Market Size of ~INR 900,000 Cr
Mortgage finance available broadly
1%(0.7MM)
5%(3.4MM)
22%(15.0MM)
33%(22.4MM)
4%(2.7MM)
1000020000
>80000
3000040000
INR 12K in theformal sector, limited availability below MHIof INR 12K; negligible availability to theinformal sector
Presence of urban development bodies(DDA, MHADA)
Nascent presence of scale private
developers (TMC, Tata, Homex)
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Live in poorlyconstructed smallcramped houses
Poor sanitaryconditions -
shared toilets, baddrainage, waterlogging duringmonsoons
Lack of facilities -properly plannedaccess points,walkways,
gardens,dedicated schoolsetc.
Appalling conditionsof Slum-Dwellers
Customer Perspective: Social Need and Willingness to Pay
(16 Focus Groups and over 2,000 potential customers)
Many lower incom e households l ive in poor co ndi t ions and are dissat is f ied with their
hou sing si tuat ion; bu t their searches for af fordable housin g have been unsu ccessfu l
Steady job
as a factoryworker in a textileenterprise in Ahmedabad
Monthly HH income ~ Rs8,000, ($160) savings upto Rs 900 ($18) p.m.
Profile - Nathubhai
Source: Primary Research (n=2000), Monitor Analysis
Self-employed Mechanic in Mumbai
Monthly HH income~ Rs 11,000 ($ 220),savings up toRs 1000 ($ 20) p.m.
Lives in 150 sq. ft.
room in slums, Rent Rs 2,400 ($ 48) Married with 2 children
AssetsBank Account, LIC (Rs 1.5L),Refrigerator and PC
Education: Both children attendEnglish-medium school
Rent: Has seen significant & frequentincreases in rent, has moved house 5
times in 12 years
Profile - Ganesh
Both share a dreamA house of their ownCan afford a 250-350 sqft. house, willing to make 20% down payment &
pay 35% of monthly income as EMIs to realize their dream
Lives in 1 RmK in low incomeneighborhood, Rent Rs 1800 ($ 36)
Family size: 5 (mother, wife, 2 children)
AssetsBank Account, LIC (Rs 3L), TV
Education: Both children attend privateGujarati medium schools
Rent: Increased by 50% in past 3 years,
has moved every 2 to 3 years
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Low Income, not Low Cost or Low Quality
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Project details UOMKey
Numbers
Option With Land Cost / No Revenue ShareTotal Land size 10 sq. ft . 435,600
FSI allowed 1.80
Total area available for construction sq. ft . 784,080
Area for Commercial 5% sq. ft . 39,204
Area for Residential 95% sq. ft . 744,876
Land Cost FSI INR/sq. ft. 200
Construction Cost INR/sq. ft. 800
Average size of flat (sq.ft.) sq. ft . 396
Number of flats nos 1,883
Average realisation per flat (Rs) INR 476,799
Mix of Houses - Area % of number
1 RMK 29% sq. ft . 220
1 BHKType 1 32% sq. ft . 300
1 BHKType 2 40% sq. ft . 400
Loading Factor for Saleable Value 25%
Mix of Houses - Base Price in Phase 1
1 RMK INR/sq. ft. 1100
1 BHKType 1 INR/sq. ft. 1200
1 BHKType 2 INR/sq. ft. 1250
Price Rise between Phases 0%
Average Residential (Rs) INR/sq. ft. 1,205
Average Commercial Yield Factor 2
Commercial (Rs) INR/sq. ft. 2,410
Overall realization fromproject
Revenue from different SourcesCommercial (Rs) INR 9.45
Residential (Rs) INR 89.76Overall Realization of theProject (Rs. Crores) 99.21
Costs from different Sources
Cost of landINR
cr. 15.7
Construction CostINR
cr. 62.7
Sales and MarketingINR
cr. 3.0Overall cost of project (Rs.Crores)
INR
cr. 81.38
Net realization (Rs)INR
cr. 17.82
Margin 21.9%
Return on Investment (IRR) 40%
Assumptions:The project is constructed over 3 phases - each phase
consists of approximately 600 flatsPrice is constant over the duration of the projectThe value of area per square feet is enhanced using twomethods:Commercial space is valued more than residential spacewith an Average Yield Factor of 2
The mix of flats is such as to allow some area tobe sold at a higher price point
Cost of construction is Rs. 800 per square foot(comparable to other estimates for such projectsbased on our experience)
Land is owned by the developer
An Alternate Business ModelLand as Inventory
Sample Project Economics: Margin22%, IRR40%
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Conveying the opportunityArranging customer financing
Selecting land, Obtaining customers
Sharing best practices (architectural
designs, site layouts, etc.)
Making a Market: Phase 1: 2008-2009
Facilitating supply using an ecosystem approach
Government, regulatory bodies etc. Press (over 20 articles)
Conferences and industry sessions
One on one meetings with broad range ofstakeholders (over 400)
RAISING AWARENESS
Existing and new players for mortgage finance (includingincubating housing finance companies)
PE and VC funds (incubated a USD 100 Million housingecosystem fund)
Research on optimal architectural designs, low costconstruction technology, sustainability etc.
BUILDING THE ECOSYSTEM
Two years, 600 developers, and downturn in the economy to:1)Achieve a clear recognition in the market of the opportunity
2)Lead to a number of players in this space
SMALL
DEVELOPERS AND NEWPLAYERS
END TO END SUPPORT
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Market demonstration of Demand: Private sector projects
across India
Ahmedabad: Vatva
Taral Bakeri
Phase 1: 800 unitsConstruction start: June 2009Price: Rs 3.3 lakh5.6 lakh
Mumbai :Ambivili
Neptune Group100 acresPhase 1: 1800 units;Sector 1: 600 flats sold outin 3 days1-BHK and 2-BHKRs 4.73 lakh and Rs 8.40 lakhProject launched on March 27
Maharashtra: KarjatTMCMatheran Realty
15,000 units by June 2011;3,000 units in Phase 1June 096,000 flats @ Rs 3 lakhPossession: June 2009
Maharashtra :BoisarTata Housing67 acres: Phase 1: 1300 units for LIH
1-RMK and 1BHKRs 3.9 lakh and Rs 6.7 lakh
Bangalore: Atibele
Janadhar11 acres: 1500 units1BHK and 2 BHK; Rs 4 lakhand 6 lakh Bangalore: Value Budget Housing
Rs 3-9 lakh townships on minimum10 acre plots
Ahmedabad: Vatva
Foliage DevelopersPhase 1: 400 unitsPrice: Rs 2.81 lakh upwards
Potential demand from 21 Million Households with
estimated Market Size ~INR 1,300,000 Cr (USD 260 Billion)
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Entry by potential scale players
Tata Housing
Launched a low income
housing township in Boisar,98 kms from South Mumbai
Spread over 67 acres andhas 1,000 flats in the firstphase
1 RMK 283 sq. ft and 1 RMKwith 360 sq. ft.
Flats priced between Rs. 3.9lakh and Rs. 6.7 lakh
Value Budget HousingDevelopment Corporation
Jerry Rao (founder,
MphasiS) and P.S.Jayakumar (ex Citibank) setup housing developmentcompany
Large business opportunitywith significant social impact
Goal: 1 Million homes inurban India in price range ofRs. 3-9 lakh in next decade
The company has partneredwith Monitor to test feasibilityof vision, provide in-depthknowledge of the market andassist in building theorganization structure
Tanaji Malusare City
Launched by MatheranRealty Pvt. Ltd. in Karjat
Aims to create large scalecommercially viable housingfor lowincome households
66,000 applications for saleof 3,000 units in Phase 1.
Will contain 15,000 flats
1
RMK 200 and 300 sq. ft. at2.1 lakh and 3.15 lakh,1BHK 400 sq.ft. at 5.25 lakhand 2BHK 500 sq.ft. at 7.35lakh
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Affordable Housing
Low Income Housing as a Driver for Economic Growth
Wide Range of Benefits
Market based affordable hous ing c an be part of a broader port fo l io of so lut ions to
hous ing for the poor and lower income groups
Aiding Overall Economic
Development Construction of low income housing
provides disproportionate job creatiion
Creates signficant economic value forstate (taxes, anxiliary economicactivity, source of labor potentiallyleading to industry, etc
Provide alternative to Urban Slums
~40M people live in urban slums without basicfacilities such as sanitation, water, schools, etc
Renters disempowered. All power is w/ slum lords
Slum lords own houses and benefit from Slum
Rehabilitation Schemes
Slums create high pressure on infrastructurewithin a city
Benefits for families of Urban LIG
Housing is essential for the well-being of afamily
Enhanced security and health throughorganized housing with access to sanitation
Access to better services (schools, healthcareetc.) which are typically available to higher-income groups
Creation of Low-Risk Asset for Families
Long term wealth creation due to value ofasset, saving on rent & collateral for loan
A security net in crisis
Low income houses typically built on land withlow cost per sq. ft. Low likelihood of pricedepreciation, Hence downside risk is low
Allows Government funds to focuson poor
Limited government resources can bespent on rental and owned housing forpoorer sections of society
Sets benchmarks that can be used forhousing for the poor
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Our path forward: Monitors plans for the next two years
Attract players who can provide large scale low income housing at reasonable prices, including Facilitating entry of mid/large developers,
Attracting international low income housing developers and new players into the field
Formal Sector: Highlight opportunity for low income home financing to large banks and HFCs
Informal Sector: Catalyzing housing finance through banks, dedicated HFCs, MFIs, etc.
Facilitating access to low-cost, long-term debt
FacilitatingConsumer
Finance
Ensuring Supply ofHousing (DistinctBusiness Model)
In the next few years, we intend to facilitate the scaling up of a robust, commercially viable,and sustainable low income housing market in India
Develop a list of options relevant in the Urban Indian Context, including the pros and cons ofeach option and the situations where it would be effective
Working with the central Government and nodal agencies like NHB to transfer this knowledge tolocal decision makers.
SupportingGovernment Scale
up Low IncomeHousing
Sustainability Elements in Low Income Housing
Developing Consumer Education Modules Developing a Paradigm for Low Income Rental Housing
Monitoring, Evaluating, and Spreading Best Practices/Addressing Unintended Consequences
Developing Architectural Benchmarks and Low Cost Construction Technologies
Working with financial institutions to lower cost of service for low income customers
Including low income housing in SEZs
Facilitating the flow of long term low cost debt to the sector, including warehouse facilities and
securitization options.
FacilitatingBroader Market
Innovations
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Back-up
C fid i l
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Key Challenges and Critical Success Factors
Some traditional developers have expressed interest in low income housing because of thecurrent economic downturnonce the market recovers, may move out of this space
Most developers are building affordable homes that cost between Rs. 10-20 Lakhs, but the realneed and business opportunity is houses costing Rs. 3-7 Lakhs
The challenge is to ensure a sustained supply of housing in the Rs. 3-7 Lakhs price range
Access to home financing for low income customers remains the major choke point to the scaledevelopment of this market
There is a need for additional traditional financial institutions to serve the salaried low incomemarket, since existing banks and HFCs are slow to process loans and charge high rates of interest
New entrants are required to serve the low income informal customer segment - this group iscurrently un-served because they are perceived as being high risk and high cost to serve
Facilitating
ConsumerFinance
Ensuring SustainedSupply of Housing in
the Rs. 3-7 LakhsRange
Several chal lenges w i l l need to b e addressed in o rder to enable the creat ion of a
robu st , comm ercial ly viable, and sus ta inable low inc ome housin g market in India
While the government is interested in stimulating private sector led approaches to low incomehousing, they are unclear on effective enabling policy measures
They are concerned that the private sector is largely profit driven and benefits will not percolate to
customers State policies need to be customized to local situations on the ground to be effective
SupportingGovernment Scale
up Low Income
Housing
The low income housing market will also require the creation of an enabling ecosystem throughinterventions/projects such as:
Introduction of Sustainability Elements, Development of Consumer Education Modules, Development ofa Paradigm for Low Income Rental Housing, Monitoring, Evaluating, and Spreading BestPractices/Addressing Unintended Consequences, Developing Architectural Benchmarks and Low CostConstruction Technologies , Working with financial institutions to lower cost of service for low income
customers, Including low income housing in SEZs, Facilitating the flow of long term low cost debt to thesector, including warehouse facilities and securitization options etc.
FacilitatingBroader Market
Innovations
C fid ti l
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Facilitating Supply of Housing for Low Income Customers
Due to the economic downturn, some traditional developers have expressed interest in lowincome housing because of the current economic downturnonce the market recovers, maymove out of this space
Most developers are building affordable homes that cost between Rs. 10-20 Lakhs, but the realneed and business opportunity is houses costing Rs. 3-7 Lakhs
The challenge is to ensure a sustained supply of housing in the Rs. 3-7 Lakhs price range
There is broad awareness in the market of the business opportunity in Low Income Housing soour approach will be reactive
For developers who are currently in (or interested in) this space, encourage them to buildhousing in the Rs. 3-7 Lakhs range Focus on large and medium developers
Facilitate the entry of new, scale players (such as corporates, successful entrepreneurs).Demonstrate commercial viability and sustained demand for homes costing between Rs. 3-7
Lakhs, and help them enter this market through provision of end-to-end support Monitor support varies from non-commercial sharing of information to light-touch customized
delivery of existing information to traditional customized consulting.
Monitor is also tracking the space and engaging with a broad group of developers (doing groupsessions on areas like ways to lower cost of construction, sustainable elements, etc)
Approach
Challenge
We would l ike to ensure a susta ined s upp ly of h ousin g in th e Rs. 3-7 Lakhs range, and
faci l i tate the entry of n ew, sc ale players in to this market
C fid ti l
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Facilitating Consumer Financing for Low Income Customers
Access to home financing for low income customers remains the major choke point to the scaledevelopment of this market
For low income formal sector customers:
Large public sector banks are slow to process loan applications
Small housing finance companies charge higher rates of interest to cover their cost of funds
New entrants are required to serve the low income informal customer segment - this group iscurrently un-served because they are perceived as being high risk and high cost to serve
Understanding real versus perceived credit risk and managing costs to serve are the keychallenges for HFCs serving the informal sector
Encourage a few traditional financial institutions to serve low income formal sector customers
Work with them on specific projects and ensure they see the value in the market
Work on policy aspects to encourage traditional Fis to serve this market
Incubate new housing finance companies to serve the informal sector etc. Dissemination of the opportunity through media, conferences & events, and group sessions
Highlight the opportunity to a shortlist of alternate financial institutions such as MFIs, NBFCs,cooperative banks etc. who have the reach and potential capabilities to effectively serve thismarket
Help them start an HFC. From designing the go-to-market strategy and configuration todeliver, to raising funds (helping them with the IM and using our network of capital providers),to connecting them to other service providers and players and helping them with their NHB
application.
Approach
Challenge
We would l ike to extend access to hom e f inancing to low inc ome custom ers, especial ly
inform al sector workers
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Supporting the Government to Scale Low Income Housing
The government, at the central and state level, is interested in facilitating the supply of affordablehousing through the private sector; but is unsure of effective ways to do so
They are concerned that the private sector will enter this segment to make large profits, andbenefits will not percolate to the customers
The local situation on the ground and policies will define the appropriate low income housing
solution on the ground
Work with the central government to develop a portfolio of options to incentivize private players
to provide low income housing
Create a list of options relevant in the urban Indian contextidentify the pros and cons of eachoption, and situations where they are applicable and/or likely to be misused .
Shortlist a set of options that are effective in different environments
Work with the central Government and nodal agencies like NHB transfer this knowledge to localdecision makers
Support a few ULBs on implementing these options and use this learning to refine the options
PreferredApproach
Challenge
We would l ike to work w ith centra l and s tate governm ents to devise ways to inc ent iv ize
the pr ivate sector to provid e access to low incom e housing
Leverage our networks to address Urban Local Bodies (ULBs) and state governments to raiseawareness of the potential for private sector led approaches to low income housing
Follow up with interested ULBs/States to raise awareness among developers in theirgeography
Provide support in getting a few projects off the ground
Tie-up with the local governments to deliver targeted pieces of support, e.g., customer educationmodules
Short TermApproach
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Development and Facilitation of Market Innovations
The success of the affordable housing market in India will create a new group of home-ownersthat is unaware of the responsibilities of home ownership. We intend to:
Communicate key information on home/developer selection, financing, maintenance, and longterm value enhancement to this segment
Create modules in a format that is easily accessible to target segmentsi.e. in local languages,involving role-play and illustrations
Disseminate this information through stakeholders that have aligned incentives (e.g., developers
and housing finance companies on a financial education module).First module wi l l be a custom er f inance modu le (in discus sion w ith FMO about funding)
The low income segments move from their current rental housing into the low income flats, theywill be among the first home-owners in this income group. While we expect the impact of movingfrom tenements and slums into homes in good neighborhoods to be positive, there are also likelyto be problems. If we can identify these early, we may be able . Therefore we intend to:
Assess the financial, socio-cultural, and broader (e.g., health, education levels) implications onthe first sets of customers (about 200) moving into these low income houses
Follow a these customers over a 30 month period; this will also allow determining outcomes ofareas like home ownership, maintenance, etc.
Develop approaches to reduce negative factors and spread best practices
Provide rapid feedback to developers, housing finance companies, the government, and otherrelevant stakeholders (RBI, NHB etc.) and engage relevant players in addressing theissues/opportunities (so these become the norm in the market
Monitoring,
Evaluating, andSpreading BestPractices/
AddressingUnintended
Consequences
Development andDissemination of
CustomerEducationModules
In addi t ion to our co re market making ef for ts , we intend to w ork o n specia l projects
that wi l l help create an enabl ing ecosys tem for the scalable grow th of low incom e
hou sing in India
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Development and Facilitation of Market Innovations
The creation of the low income housing market offers a rare opportunity to introduce a new set ofenvironmentally sustainable elements in the market. If these elements are included in earlyprojects that are commercially successful, they are likely to be replicated by future entrants inthis space
We have identified an initial set of feasible sustainability elements that are environmentally
better than conventional practice without increasing cost. We would like to expand this list,quantify the benefit of these elements, include some of them in the new projects and propagateinformation about them.
SustainabilityElements in LowIncome Housing
In addi t ion to our co re market making ef for ts , we intend to w ork o n specia l projects
that wi l l help create an enabl ing ecosys tem for the scalable grow th of low incom e
hou sing in India. These projects are pending fu nding from sp ons ors
There is a clear need for more and better quality rental housing, and there may be acommercially viable opportunity to provide such housing
We would like to understand the current living conditions of families such as recent migrants,young breadwinners etc. who cannot afford to buy homes of their own and their interest in rentalsthat the market can provide, regulatory issues, the potential of combining a rental modelownership housing, etc.
This is likely to lead to a innovative models for rental housing and a clear articulation of a
business opportunity which we could help implement and scale
Developing aParadigm for Low
Income RentalHousing
We are also interested in exploring broader market making efforts such as:
Developing Architectural Benchmarks
Developing Low Cost Construction Technologies
Facilitating the flow of long-term and low-cost debt to the sector, including warehousing facilitiesand options for securitization
Including Low Income Housing in SEZs
Working with financial institutions to lower the cost of service for low income customers
FacilitatingBroader Market
MakingInnovations
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Monitor Group: An Introduction
Michael Porter,Harvard Business SchoolDirector and Co-Founder
of the Monitor Group
Founded by renow ned academic s, the Moni tor Group has grow n rapid ly to become a
leading glob al management con sul t ing and merchant banking f i rm
We believe that Ideas can create impact.
Founded by Michael Porter and other HBS faculty in 1983
Renowned for focus on strategy and cutting-edge ideas thathelp clients grow
With over 25 offices across the globe, we go the last mile
Corporates Governments Non Profits
Growth Strategies Leadership &Innovation
Private Equity Funds
City StrategiesCluster Development Country
Competitiveness
Social Venture FundsImpact InvestingEducation Ecosystem
Confidential
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Monitor Inclusive Markets in India
An autonomous u ni t that is act ive ly faci l ita ting sc aling o f market based solut ion s
Customers
Developers
FinancialInstitutions
ConstructionTechnology
Identifying and refiningbusiness models at scale
Making the market for low incomehousing in India
Confidential
U b H i M k t 2007
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Urban Housing Market 2007
Smallest house costs ~ Rs. 5 Lakhs (~ USD 10,000)
Source: NHB Trends in Housing; CRIS Infac Report; Monitor Research
Urban India Expenditure &
IncomePyramid
16%(10MM)
37%
(~23MM)
33%(~21MM)
14%(~9MM)
MHE:
Rs 9,625 pm
MonthlyIncome
Rs. 11,000
USD 220
Rs. 2,500USD 50
Rs. 5,000
USD 100
LESS THAN TOP 16% of Urban Indian
Households can afford to own houses
Current segment served
Ahmedabad / Vadodara
Mumbai
Jaipur
Hyderabad
Multiple builders: Three room
flats @ Rs 950 / sq. ft. Vatwa, 12 km from city centre;
40 minutes travel, Naroda
Land rate of 80L to 1.1 Cr per acreavailable 45 minutes to 1 hourfrom city center, FSI of 1.8 givenfor 60% of the plot size
1RK flat at Karjat, (Mumbaisuburb) being sold at Rs 999per sqft
Land rate of 0.6 -1.2 Cr peracre available in Titwala, FSInorm of 1
Potential to provide housingat Rs 800Rs 1000 per sq.ft.However, overriding concernis financing of these houses
1BHK flats (450500
sq. ft.) being sold at Rs 9001,200 per sq. ft. in areassuch as Uppal, L B Nagar,Kuthapet, Kukatpalli etc. butnot on a large scale.
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Th t it S ll h i t i t t
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The opportunity: Smaller houses using current private sector
construction practices
Source: NHB Trends in Housing; CRIS Infac Report; Monitor Research
Urban India ExpenditurePyramid
16%(10MM)
37%(~23MM)
33%(~21MM)
14%(~9MM)
MHE:
Rs 9,625 pm
MonthlyIncome
Rs. 11,000
USD 220
Rs. 2,500
USD 50
Rs. 5,000
USD 100
Target segment for this project
250-400sq ft.
houses
Potential to provide housing for 1521 Million urban households
Cost Structure : Project IRR of 3040%
Rs 150-250
Land &Legal
Rs 25
Design
Rs 550-650
Construction Costs
Rs 70-100Rs 10-25
Infrastructure Costs
Marketing
Rs 15
Salaries
Rs 25-60
Interest
Rs200-300
PBT
Rs.1100-1400
Total
Operating ProfitabilityProject IRR 30-40%
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Efficient Use of SpaceSample Unit Layout
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I t t i H i
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Interest in Housing:
Focus Groups Household IncomeRs. 6,700- 7,700/month ($ 140)
Housing Concept3Tested with Respondents
Area: Housing is within 1 hourof the city centre4
Complex would comprise 6 buildings with 32 flats in
each building (8 flats/ floor and 4 floors)
Regular water and electricity
No liftsand single set of staircases
Complex would have a compound wall with sharedopen spaces including garden and play area for kids
Close to primary, secondary schools,
healthcare centre and market place
Well connected to city by bus linkages
Each flat would have a built up area of~ 300 sq.ft.(large cities) or 400 sq. ft. (small cities)
1 BHK with an attached toilet and bathroom Well painted walls and well ventilated
Rs 300 per month as maintenance charges
Al l respond ents were very
interested in th is con cept
Key is strong interest , proxim ity to faci l it ies (e.g. schoo ls, market places), conn ect iv i ty
v ia publ ic transport and shared open spaces
Note: 1Interest rate assumed to be 12%; 2Rent excludes electricity and water payments; 3Price for lower-income segment housing estimated at Rs. 900/sq ft3Housing concept tested is based on examples of larger (400-500 sq. ft) flats constructed in cities like Ahmedabad; 4The project team identified areas in thevarious cities where apartments could be constructed at property rates of Rs. 800-1,000 / sq. ft and these specific locations were tested with respondents
Maximum Affordable
EMI Payments
Rs. 2,450 / month(35% of monthly income)
Maximum Affordable
Housing Unit
(Super Built Up)
292 sq ftRs . 2,92,000
Customer Profile:Income: Rs. 7,000/month
Maximum AffordableDown Payment
Rs. 70,000
Housing LoanTenure1
20 years
Current Rent(Large City)
Rs. 1,5001,800per month2
Current AverageSavings
Rs. 7001,000per month
Confidential
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A Low Income Housing Finance Business: Outline
Geography: The need for low income housing and home loan financing is especially acute in urban areas,which are seeing rapid population expansion through migration from rural areas
Reach: The HFC will have an urban focus and will establish presence in Metros and surrounding TierI/II/III cities
Branch: Hub and Spoke model with 55 branches by Year 10
Target Monthly Household Income range: Rs. 5,00020,000
Customer groups: Both salaried customers who are unable to access home loans and informal sectorcustomers, i.e. self-employed and salaried unorganized individuals
CustomerProfile and
Focus
Product
Offerings andPricing
Structure
Primary Product: Loan for home purchase
Loan Amount: 28 Lakhs: Families earning between Rs. 5,000 and 20,000 can afford homescosting up to 40 times their monthly income, i.e. Rs. 310 Lakhs
Loan to Value: 5080%: A minimum of 20% equity from the customer will help mitigate thefinanciers risk, while ensuring that the loan is not sub-prime
Installment-Income Ratio (IIR): 30 - 40%: This income group typically pays between 20 - 25% oftheir monthly incomes as rent, so a 30 - 40% EMI is feasible
Loan Tenure: 615 years: Will vary based on the customers income
Pricing Structure
Adjustable Rate Mortgages with typical interest rates between 11 - 15% based on down-paymentamount, IIRs, loan Tenure, and perceived risk profile of customer; and allowing approximately a 3-4%spread
Processing fee of 1% of loan value to re-cover loan origination and credit check costs
The bus iness wi l l pr im ar i ly focu s on the urban cus tom er in the Income Group Rs.
5,000-20,000 wh o do es not c urren tly have access to a hom e loan
A Low Income Housing Finance Business
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Per Customer Cost Analysis
A Low Income Housing Finance Business
Customer Level Economics: Branch Level Revenue & Costs
The average cost to acquire a customer is Rs. 8,000 and cos t to serv ice their loan ov er
the loan term is Rs. 20,000, while the net inc om e earned p er cus tom er is Rs. 88,000
CosttoServePerCustomer(Rs.)
IncomeEarnedPer
Customer(Rs.)
Assumptions
Average Loan Size: Rs. 4 Lakhs
Interest Rate Charged: 14%
Loan Processing Fee: 1%
NPA: 1.0%1
A 0.5% of loan value bonus is provided to the branchsales force as an incentive fee for each loangenerated
These assumptions are typical for most HFCs (our
data is based on inputs from Dewan, GRUH, HDFCand MHFC)
Observations
It costs approximately Rs. 32,000 to serve each
customer, i.e. cost to serve is about 8% of loan size, The HFC would earn approximately Rs. 88,000 in net
income from each customer
Net Profit Per Customer Over 8 years (not includingother costs) is approximately Rs. 56,000
Note: 1 DHFC and Gruh NPAs are less than 1%
32,00020,000
4,000
1,0002,0002,000
3,000
0
5,000
10,000
15,000
20,000
25,000
30,000
35,000
SalesIncentive
OfficeOverheads
AverageNPA
Documentation,Storage &Retrieval
Legal &Technicalclearance
Total Costto Serve
OperatingOverheads
88,0004,00084,000
0
10,000
20,000
30,000
40,000
50,000
60,000
70,000
80,000
90,000
Processing FeeNet Interest Income Total
Per Customer Revenue Analysis
A Low Income Housing Finance Business
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Profitability over a 10 year time period
A Low Income Housing Finance Business
Profitability over a 10 year time frame
The HFC wil l tur n pro f i table after 3 years of o perat ions , and it is antic ipated that
margins w i l l grow sequent ia l ly in progressive years
NetProfit/
(Loss)(Rs.crores)
PercentageRetu
rn
Note: 1 Based on conversations with HFC Industry Experts and existing HFCs
Assumptions1 Average Loan Tenure: 8 years
Cost of debt: 10%
Debt Equity ratio:
Year 5- 4: 1
Year 10- 6: 1
Capex in Years 1 to 3- Rs 3 Cr (towardssoftware and hardware)
NPA of 1 % provided on all loans disbursed
from Year 4 Net Profit/Loss = Post Tax (Income
Expenses)
ROE = Net Profit/Loss / Average Equity
ROA = Net Profit/Loss / Average Assets
Observations
The HFC will operate at a loss for the first fewyears, but will turn profitable by year 3
ROE of 23% in year 10 is very robust by theIndian financial industry standards
ROA of 3% in year 10 is comparable to HFCindustry standards
276.9
52.627.316.0
5.60.8-1.2-2.8
-50
0
50
100
150
200
250
300
Y5Y3 Y4Y2Y1 Y7 Y8Y6 Y10
180.3
Y9
101.9
3.33.22.92.62.52.90.8
23.022.0
19.017.0
13.0
10.0
6.0
1.0
-13.0-15
-10
-5
0
5
10
15
20
25
Y5 Y6Y3 Y4
2.2
Y2 Y7
-4.0
-13.9
-3.0
Y1 Y10Y9Y8
Return On Equity
Return On Assets
Confidential
Low Income Segments as Target Market
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Low Income Segments as Target Market
Untested Risk Profiles, different from Sub-prime in USA
75-80% LTVsignificant individualcontribution required; EMIs tend to be 35%of Monthly Income
Target customers have regularemployment, albeit with low incomewithan unproven credit record which needs to
be tested In the low income segment, relatively low
cost of land (esp. in peri-urban areas)leads to high correlation between cost ofasset and replacement cost; and hencelower risk of asset bubbles
Low-Income Housing in India
Outcome: Untested, relat ively
low-r isk segment with
s igni f icant bus iness potent ia l
Very high LTV; creative structuresdeveloped to reduce EMIs
Loans extended without dueconsideration to ability to pay (basisemployment history)financingprovided to those with questionable
employment record Cost of asset disproportionately high
compared to replacement cost; this isattributed to the real estate asset bubblein the UShence high risk of paymentdefault
Sub-prime Experience in USA
Outcom e: Sub-pr im e Defaul ts
and Foreclosures
Confidential
Low Income Housing as a Driver for Economic Growth
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Construction Laborer in India
Low Income Housing as a Driver for Economic Growth
Significant Employment Potential to Lower-Income Segments
1,300
Capital2
550
RawMaterial3
400
GrossMargin
Labor
3,000
750
Total
250
LaborCapital
250
400
GrossMargin
RawMaterial
1,200
300
Total
Low Income Housing ProjectTraditional Housing Project
Note:2Includes land costs, design expenses and equipment costs; 3Includes cost for steel, cement, tiles etc;Source: Construction Industry Development Council Report, Industry Experts, Monitor Analysis
Largest spendon labor
Within the constru ct ion ind ustry w hich is the largest employers of labor in urban India,
affordable housin g emerges as the most labor- intensive pro vid ing h igh po tent ial for
employment oppor tun i ty to the urban poor
With 31 million workers(2005), the ConstructionIndustry is the leading providerof employment to lowerincome segments in UrbanIndia
A typical construction workeris from states withlower economic
development (U.P.,Bihar), a dailywage earner
(income of ~Rs 100 per day),resides in temporary
settlement near constructionsite and has been badly hit byinflation and slowdown in
construction industry
Comparison of spend on Labor in Construction Projects(as % of total Project Value)
13% 25%
Confidential
Interviews with over 30 Housing Developers
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Interviews with over 30 Housing Developers
Interest in Low Income Housing
Large pr ivate developers are not interested in the segment unless i t faci l ita tes accessto addi t ional land for h igh end pro jects whi le some medium / sm al l pr ivatedevelopers are interested in s erv ing the segment prov ided they get suf f ic ient
volum es and f inancing is avai lable for custom ers
Large Private Developers Medium and Small Private Developers
Very limited interest in building housing for low incomecustomers
Developers believe that there is still a largeopportunity in housing for middle income andhigher income segments
Recognize land as an extremely valuable resourceand consider stand alone low income housingprojects as sub optimal utilization of available land
Not willing to compromise on profit margins
Believe that it is difficult to make housing atprice affordable for low income segment
Interested in looking at housing for low incomecustomers only if developing such housing helps themacquire land (from the government) for high endresidential and commercial projects
Willing to cross subsidize low income houses
Believe that there is high competition in the middlesegments and market is saturating
Some medium and small developers recognize theopportunity in low income housing are interested in
looking at the segment Believe they have the management capabilities for
taking on such additional projects
Believe that it is viable to serve this segment whileearning close to their current margins (20-30%)
However, need comfort that they will get sufficientvolumes from this segment; concerned about nonavailability of housing finance to the segment
Some developers have also expressed interest inbeing part of a pilot project
Confidential
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Financial Institutions: Current Market Focus
The target segm ent is largely u n-served select medium sized HFCs and banks have asmal l presence amo ng cu stom ers (pr imar i ly salar ied) with hou sehold income above Rs.
5,000 per mon th
> Rs. 10 K
Rs. 8K
10 K
Rs. 5K 8K 1
Rs. 3K
5K
Rs. 2.5K 3K
Large Private and Government Banks, Large Housing Finance
Companies
Limited MFIs (Home repair / extension loans)
Note: 1 Certain large private banks willing to look at salaried customers with income level down to Rs. 5,000 per month if there is proper documentation and
sourcing / collection is done through third parties thereby managing the overall cost to serve the segmentSource: Discussions with Industry Participants, Monitor Analysis
TargetSegments
fortheProject
Select Medium Sized
Housing Finance
Companihes, Co-op
Banks, NBFCs
Large Private and
Government Banks,NBFCs
Salaried (Organized) Self Employed & Salaried (Unorganized)
Banks typically treat
the unorganized
salaried segment as
part of self employed
Government Banks, Medium Sized
HFCs, Co-operative Banks, NBFCs
(Select players, small % of portfolio)Shaded portion represents un-
served customer segments
Confidential
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Payroll deduction Facilitates aggregation
and information oncustomers
Retention tool High productivity
New Housing Business Model: Salaried Sector
The new pro duc t for those employ ed in formal sector set t ings required several
reconf igurat ions o f exist ing p rodu cts and pract ices, with a direct l ink to cu stom er
employers
Developer
(Small andMedium)
FinancialInstitution
Employer
Developer
(Small andMedium)
FinancialInstitution
Employer
FormalSector
Customers
Opportunity to Set Standards:Architectural Design, Maintenance, Consumer Education
Construction Finance
No construction finance(concern on buyers / delays)
FormalSector
Customers
Developer puts 500 sq.ft.+
apartments on market in
phases (34 years) and gets
individual, walk in customers
Serve 1 customer ata time, wont financebelow Rs. 12,000/month
Affordable
200-350 sq ft
uni ts , good
quality, no
delays
Upfront,
f inanced,
aggregated
customers
Loans ataffordablerates
Aggregated low
risk, low cost toserve customers
Current Bottom of the Market (12k20k) Alternative Model Serves 6k12k Market
Uncertainty of Sales Sales and Mktg. costs Funding constraint
Risk of Delays
Retention issues
Confidential
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Financialreturn withalignedincentives
Aggregatedcustomers
Potentially
low risk Low cost to
serve
Aggregatedcustomers
Use of tools suchas rolling guaranteeto reduce risk
Credit check,collection, consumereducation
Uncertainty of Sales Sales and Mktg. costs Funding constraint
Risk of Delays
Developer
(Small andMedium)
New Housing Business Model: Informal Sector
The new prod uct for thos e emp loyed in informal sector set t ings may require the
introdu ct ion of MFIs as an aggregator and p otent ial ly a credi t guarantor to incent iv ize
f inancing
FinancialInstitution
Current Bottom of the Market (12k20k) Alternative Model Serves 6k12k Market
Developer
(Small andMedium)
Customers
MFI
FinancialInstitution
CreditGuarantee
ConstructionFinance
Affordable
200-350 sq ft
uni ts , good
quality, no
delays
Upfront,
f inanced,
aggregated
customers
Often will not finance
InformalSector
Customers
No construction finance(concern on buyers / delays)
Developer puts 500 sq.ft.+
apartments on market in
phases (34 years) and gets
individual, walk in customers
Confidential
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Summary of Various Affordability Levers
Various qu ant i f iable af fordabi l ity levers signi f icant ly di f fer from each o ther in terms of
impact on affordabi l i ty and feasib i l ity
Note: 1 Sales Tax and Excise Duty Exemption;The numbers in the graph represent the percent reduction of gap in affordability due to the leverSource: Discussions with Industry Participants, Monitor Analysis
LandSubsidy
SubsidizedConstructionmaterial
Bulk MaterialPurchase
LongerTenure Loan
Stamp Duty andRegistration
waiver on Land
FSIIncrease
TaxConcessions1
InterestSubsidy
Semi FinishedConstruction
Low CostConstruction
Small SizedHouses
MediumHigh LowFeasibi l i ty
Stamp DutyExemption
to CustomerIncome taxExemption toDeveloper
Registration Fee sWaiver to Customer
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Sales and MarketingProject implementation
Support provided across the affordable housing value chain
Development ofbusiness planincluding strategy
Organization designand structure
Roles andresponsibilities
Identification offunctions that can beoutsourced/inhouse
Project/BusinessEconomics
Sensitivities of planto approval process,construction costsand time, salesefficiencies, etc
Business Blueprint
Business Planningand Organization
Design
Landselection
andvalidation
Design andDevelopmen
t
Productmix andpricing
Salesprocessdesign
Training ofclient team
Databank of unitlayouts (Lowercost and increasevalue to customer)
Improve mix ofcommercial andresidential toimprove returns
Databank of sitelayouts toincorporate open,green spaces,
max FSI, etc.)
Strategy toreach out todifferent sets ofcustomers
Building thesales processfrom the time acustomer walksin to the projectuntil the timepossession ishanded over tothe customer.
Templatizeprocesses
Access to Monitor Networks
Financing
End to end handholding : Base IP and customized application; Decision support and overall knowledge
Access tohousing
financingcompanies
Access to targetedfinancing for specificprojects
Access to double-bottomline funds forinvestment at abusiness level
Access to PE fundsinterested ininvesting inaffordable housing
Developing list ofattractiveness criteriaas well as inhibitingfeatures to evaluateareas for determiningbuy decision
Validation of selectedland parcels
Facilitating site visitsby potentialcustomers to
determineattractiveness anddemand.
Project phasing
Developingoptimal productmix given FSInorms and desiredreturns
Differentialproduct pricing
Work withbanks, MFIs andspecializedinstitutions toenable access tofinancing optionsfor customers atbooking stage
Tie-ups withfinancialinstitutions forboth formal andinformal sector
customers
Structure team inorder to achievelong termcompetencies inselling
Train team to beable to do this atscale acrossprojects
Monitors Value Proposition to Developers