2 Offering & Market Potential Competitive Highlights Low Income Housing in India: A Rs 1,300,000 Cr Opportunity (USD 260 Billion)Urban Income PyramidOffering & Market PotentialCompetitive HighlightsMHI1 (INR)Price of unit2 > INR 25 LakhsPotential demand from ~2 M HHs with estimated Market Size:of ~INR 500,000 CrVarious mortgage finance options available for segmentLeading developers (DLF, Unitech)Highly competitive, slowing demand growth due to increasing prices and high interest costs1% (0.7MM)>800005% (3.4MM)40000–800004% (2.7MM)Price of unit: INR 10–25 LakhsPotential demand from ~5 M HHs with estimated Market Size of ~INR 900,000 CrMortgage finance available broadlyMostly small / regional developers (Naik Navare)Major plans / announcements from many large players (e.g. Omaxe, Ansals, Lodha, MAYTAS, Purvankara, etc.)30000–400005% (3.4MM)20000–3000022% (15.0MM)10000–20000Price of House: INR 3–10 LacsPotential demand from ~21 M HHs with estimated Market Size ~INR 1300,000 CrFinance available for MHI > INR 12K in the formal sector, limited availability below MHI of INR 12K; negligible availability to the informal sectorPresence of urban development bodies (DDA, MHADA)Nascent presence of scale private developers (TMC, Tata, Homex)31% (21.1MM)5000–1000033% (22.4MM)<5000Note: 1 Monthly Household Income; 2 Affordability defined as households which have EMI / MHI Ratio of 40% of a Home loan which has a 20% down payment on an 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
3 Customer Perspective: Social Need and Willingness to Pay (16 Focus Groups and over 2,000 potential customers)Many lower income households live in poor conditions and are dissatisfied with their housing situation; but their searches for affordable housing have been unsuccessfulProfile - NathubhaiAppalling conditions of Slum-DwellersProfile - GaneshSteady job as a factory worker in a textile enterprise in AhmedabadMonthly HH income ~ Rs 8,000, ($160) savings up to Rs 900 ($18) p.m.Self-employed Mechanic in MumbaiMonthly HH income ~ Rs 11,000 ($ 220), savings up to Rs 1000 ($ 20) p.m.Lives in 150 sq. ft. room in slums, Rent Rs 2,400 ($ 48)Married with 2 childrenAssets – Bank Account, LIC (Rs 1.5L), Refrigerator and PCEducation: Both children attend English-medium schoolRent: Has seen significant & frequent increases in rent, has moved house 5 times in 12 yearsLive in poorly constructed small cramped housesPoor sanitary conditions - shared toilets, bad drainage, water logging during monsoonsLack of facilities - properly planned access points, walkways, gardens, dedicated schools etc.Lives in 1 RmK in low income neighborhood, Rent Rs 1800 ($ 36)Family size: 5 (mother, wife, 2 children)Assets – Bank Account, LIC (Rs 3L), TVEducation: Both children attend private Gujarati medium schoolsRent: Increased by 50% in past 3 years, has moved every 2 to 3 yearsBoth share a dream…“A house of their own”Can afford a sqft. house, willing to make 20% down payment &pay 35% of monthly income as EMIs to realize their dreamSource: Primary Research (n=2000), Monitor Analysis
5 An Alternate Business Model – Land as Inventory Sample Project Economics: Margin – 22%, IRR – 40% Project detailsUOMKey NumbersOptionWith Land Cost / No Revenue ShareTotal Land size10sq. ft.435,600FSI allowed1.80Total area available for construction784,080Area for Commercial5%39,204Area for Residential95%744,876Land Cost FSIINR/sq. ft.200Construction Cost800Average size of flat (sq.ft.)396Number of flatsnos1,883Average realisation per flat (Rs)INR476,799Mix of Houses - Area% of number1 RMK29%2201 BHK – Type 132%3001 BHK – Type 240%400Loading Factor for Saleable Value25%Mix of Houses - Base Price in Phase 1110012001250Price Rise between Phases0%Average Residential (Rs)1,205Average Commercial Yield Factor2Commercial (Rs)2,410Overall realization from projectRevenue from different SourcesCommercial (Rs)INR9.45Residential (Rs)89.76Overall Realization of the Project (Rs. Crores)99.21Costs from different SourcesCost of landINR cr.15.7Construction Cost62.7Sales and Marketing3.0Overall cost of project (Rs. Crores)81.38Net realization (Rs)17.82Margin21.9%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 two methods:Commercial space is valued more than residential space with an Average Yield Factor of 2The mix of flats is such as to allow some area to be sold at a higher price pointCost of construction is Rs. 800 per square foot (comparable to other estimates for such projects based on our experience)Land is owned by the developer337.24 % 73%
6 DEVELOPERS AND NEW PLAYERS BUILDING THE ECOSYSTEM Making a Market: Phase 1: Facilitating supply using an ecosystem approachRAISING AWARENESSEND TO END SUPPORTGovernment, regulatory bodies etc.Press (over 20 articles)Conferences and industry sessionsOne on one meetings with broad range of stakeholders (over 400)Conveying the opportunityArranging customer financingSelecting land, Obtaining customersSharing “best practices” (architectural designs, site layouts, etc.)SMALLDEVELOPERS AND NEW PLAYERSBUILDING THE ECOSYSTEMExisting and new players for mortgage finance (including incubating housing finance companies)PE and VC funds (incubated a USD 100 Million housing ecosystem fund)Research on optimal architectural designs, low cost construction technology, sustainability etc.Two years, 600 developers, and downturn in the economy to:Achieve a clear recognition in the market of the opportunityLead to a number of players in this space
7 Market demonstration of Demand: Private sector projects across India Mumbai :AmbiviliNeptune Group100 acresPhase 1: 1800 units; Sector 1: 600 flats sold out in 3 days1-BHK and 2-BHKRs 4.73 lakh and Rs 8.40 lakhProject launched on March 27Ahmedabad: VatvaTaral BakeriPhase 1: 800 unitsConstruction start: June 2009Price: Rs 3.3 lakh– 5.6 lakhAhmedabad: VatvaFoliage DevelopersPhase 1: 400 unitsPrice: Rs lakh upwardsMaharashtra :BoisarTata Housing67 acres: Phase 1: 1300 units for LIH 1-RMK and 1BHKRs 3.9 lakh and Rs 6.7 lakhMaharashtra: KarjatTMC – Matheran Realty15,000 units by June 2011;3,000 units in Phase 1 – June ’096,000 Rs 3 lakhPossession: June 2009Bangalore: AtibeleJanadhar11 acres: units 1BHK and 2 BHK; Rs 4 lakh and 6 lakhBangalore: Value Budget HousingRs 3-9 lakh townships on minimum 10 acre plotsPotential demand from 21 Million Households withestimated Market Size ~INR 1,300,000 Cr (USD 260 Billion)
8 Entry by potential scale players Tanaji Malusare CityLaunched by Matheran Realty Pvt. Ltd. in KarjatAims to create large scale commercially viable housing for low‐income households66,000 applications for sale of 3,000 units in Phase 1.Will contain 15,000 flats1‐RMK 200 and 300 sq. ft. at 2.1 lakh and 3.15 lakh, 1‐BHK 400 sq.ft. at 5.25 lakh and 2‐BHK 500 sq.ft. at 7.35 lakhValue Budget Housing Development CorporationJerry Rao (founder, MphasiS) and P.S. Jayakumar (ex Citibank) set up housing development companyLarge business opportunity with significant social impactGoal: 1 Million homes in urban India in price range of Rs. 3-9 lakh in next decadeThe company has partnered with Monitor to test feasibility of vision, provide in-depth knowledge of the market and assist in building the organization structureTata HousingLaunched a low income housing township in Boisar, 98 kms from South MumbaiSpread over 67 acres and has 1,000 flats in the first phase1 RMK 283 sq. ft and 1 RMK with 360 sq. ft.Flats priced between Rs. 3.9 lakh and Rs. 6.7 lakh
9 Low Income Housing as a Driver for Economic Growth Wide Range of Benefits Market based affordable housing can be part of a broader portfolio of solutions to housing for the poor and lower income groupsProvide alternative to Urban Slums~40M people live in urban slums without basic facilities such as sanitation, water, schools, etcRenters disempowered. All power is w/ slum lordsSlum lords “own” houses and benefit from Slum Rehabilitation SchemesSlums create high pressure on infrastructure within a cityAffordable HousingBenefits for families of Urban LIGHousing is essential for the well-being of a familyEnhanced security and health through organized housing with access to sanitationAccess to better services (schools, healthcare etc.) which are typically available to higher-income groupsAiding Overall Economic DevelopmentConstruction of low income housing provides disproportionate job creatiionCreates signficant economic value for state (taxes, anxiliary economic activity, source of labor potentially leading to industry, etcCreation of Low-Risk Asset for FamiliesLong term wealth creation due to value of asset, “saving on rent” & collateral for loanA “security net” in crisisLow income houses typically built on land with low cost per sq. ft. Low likelihood of price depreciation, Hence downside risk is lowAllows Government funds to focus on poorLimited government resources can be spent on rental and owned housing for poorer sections of societySets benchmarks that can be used for housing for the poor
10 Our path forward: Monitor’s plans for the next two years In the next few years, we intend to facilitate the scaling up of a robust, commercially viable, and sustainable low income housing market in IndiaEnsuring Supply of Housing (Distinct Business Model)Attract players who can provide large scale low income housing at reasonable prices, includingFacilitating entry of mid/large developers,Attracting international low income housing developers and “new” players into the fieldFacilitating Consumer FinanceFormal Sector: Highlight opportunity for low income home financing to large banks and HFCsInformal Sector: Catalyzing housing finance through banks, dedicated HFCs, MFIs, etc.Facilitating access to low-cost, long-term debtSupporting Government Scale up Low Income HousingDevelop a list of options relevant in the Urban Indian Context, including the pros and cons of each option and the situations where it would be effectiveWorking with the central Government and nodal agencies like NHB to transfer this knowledge to local decision makers.Facilitating Broader Market InnovationsSustainability Elements in Low Income HousingDeveloping Consumer Education ModulesDeveloping a Paradigm for Low Income Rental HousingMonitoring, Evaluating, and Spreading Best Practices/Addressing Unintended ConsequencesDeveloping Architectural Benchmarks and Low Cost Construction TechnologiesWorking with financial institutions to lower cost of service for low income customersIncluding low income housing in SEZsFacilitating the flow of long term low cost debt to the sector, including warehouse facilities and securitization options.
12 Key Challenges and Critical Success Factors Several challenges will need to be addressed in order to enable the creation of a robust, commercially viable, and sustainable low income housing market in IndiaEnsuring Sustained Supply of Housing in the Rs. 3-7 Lakhs RangeSome traditional developers have expressed interest in low income housing because of the current economic downturn – once the market recovers, may move out of this spaceMost developers are building ‘affordable’ homes that cost between Rs Lakhs, but the real need and business opportunity is houses costing Rs. 3-7 LakhsThe challenge is to ensure a sustained supply of housing in the Rs. 3-7 Lakhs price rangeFacilitating Consumer FinanceAccess to home financing for low income customers remains the major choke point to the scale development of this marketThere is a need for additional traditional financial institutions to serve the salaried low income market, since existing banks and HFCs are slow to process loans and charge high rates of interestNew entrants are required to serve the low income informal customer segment - this group is currently un-served because they are perceived as being high risk and high cost to serveSupporting Government Scale up Low Income HousingWhile the government is interested in stimulating private sector led approaches to low income housing, they are unclear on effective enabling policy measuresThey are concerned that the private sector is largely profit driven and benefits will not percolate to customersState policies need to be customized to local situations on the ground to be effectiveFacilitating Broader Market InnovationsThe low income housing market will also require the creation of an enabling ecosystem through interventions/projects such as:Introduction of Sustainability Elements, Development of Consumer Education Modules, Development of 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 etc.
13 Facilitating Supply of Housing for Low Income Customers We would like to ensure a sustained supply of housing in the Rs. 3-7 Lakhs range, and facilitate the entry of new, scale players into this marketChallengeDue to the economic downturn, some traditional developers have expressed interest in low income housing because of the current economic downturn – once the market recovers, may move out of this spaceMost developers are building ‘affordable’ homes that cost between Rs Lakhs, but the real need and business opportunity is houses costing Rs. 3-7 LakhsThe challenge is to ensure a sustained supply of housing in the Rs. 3-7 Lakhs price rangeApproachThere is broad awareness in the market of the business opportunity in Low Income Housing so our approach will be “reactive”For developers who are currently in (or interested in) this space, encourage them to build housing in the Rs. 3-7 Lakhs rangeFocus on large and medium developersFacilitate the entry of new, scale players (such as corporates, successful entrepreneurs). Demonstrate commercial viability and sustained demand for homes costing between Rs Lakhs, and help them enter this market through provision of “end-to-end” supportMonitor 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 group sessions on areas like ways to lower cost of construction, sustainable elements, etc)
14 Facilitating Consumer Financing for Low Income Customers We would like to extend access to home financing to low income customers, especially informal sector workersChallengeAccess to home financing for low income customers remains the major choke point to the scale development of this marketFor low income formal sector customers:Large public sector banks are slow to process loan applicationsSmall housing finance companies charge higher rates of interest to cover their cost of fundsNew entrants are required to serve the low income informal customer segment - this group is currently un-served because they are perceived as being high risk and high cost to serveUnderstanding real versus perceived credit risk and managing costs to serve are the key challenges for HFCs serving the informal sectorApproachEncourage a few traditional financial institutions to serve low income formal sector customersWork with them on specific projects and ensure they see the value in the marketWork on policy aspects to encourage traditional Fis to serve this marketIncubate new housing finance companies to serve the informal sector etc.Dissemination of the opportunity through media, conferences & events, and group sessionsHighlight 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 this marketHelp them start an HFC. From designing the go-to-market strategy and configuration to deliver, 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.
15 Supporting the Government to Scale Low Income Housing We would like to work with central and state governments to devise ways to incentivize the private sector to provide access to low income housingChallengeThe government, at the central and state level, is interested in facilitating the supply of affordable housing through the private sector; but is unsure of effective ways to do soThey are concerned that the private sector will enter this segment to make large profits, and benefits will not percolate to the customersThe local ‘situation on the ground’ and policies will define the appropriate low income housing solution on the groundPreferred ApproachWork with the central government to develop a “portfolio of options” to incentivize private players to provide low income housingCreate a list of options relevant in the urban Indian context – identify the pros and cons of each option, and situations where they are applicable and/or likely to be misused .Shortlist a set of options that are effective in different environmentsWork with the central Government and nodal agencies like NHB transfer this knowledge to local decision makersSupport a few ULBs on implementing these options and use this learning to refine the optionsShort Term ApproachLeverage our networks to address Urban Local Bodies (ULBs) and state governments to raise awareness of the potential for private sector led approaches to low income housingFollow up with interested ULBs/States to raise awareness among developers in their geographyProvide support in getting a few projects off the groundTie-up with the local governments to deliver targeted pieces of support, e.g., customer education modules
16 Development and Facilitation of ‘Market Innovations’ In addition to our core market making efforts, we intend to work on special projects that will help create an enabling ecosystem for the scalable growth of low income housing in IndiaDevelopment and Dissemination of Customer Education ModulesThe success of the affordable housing market in India will create a new group of home-owners that is unaware of the responsibilities of home ownership. We intend to:Communicate key information on home/developer selection, financing, maintenance, and long term value enhancement to this segmentCreate modules in a format that is easily accessible to target segments – i.e. in local languages, involving role-play and illustrationsDisseminate this information through stakeholders that have aligned incentives (e.g., developers and housing finance companies on a financial education module).First module will be a customer finance module (in discussion with FMO about funding)Monitoring, Evaluating, and Spreading Best Practices/ Addressing Unintended ConsequencesThe low income segments move from their current rental housing into the low income flats, they will be among the first home-owners in this income group. While we expect the impact of moving from tenements and slums into homes in good neighborhoods to be positive, there are also likely to 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 on the first sets of customers (about 200) moving into these low income housesFollow a these customers over a 30 month period; this will also allow determining outcomes of areas like home ownership, maintenance, etc.Develop approaches to reduce negative factors and spread best practicesProvide rapid feedback to developers, housing finance companies, the government, and other relevant stakeholders (RBI, NHB etc.) and engage relevant players in addressing the issues/opportunities (so these become the norm in the market
17 Development and Facilitation of ‘Market Innovations’ In addition to our core market making efforts, we intend to work on special projects that will help create an enabling ecosystem for the scalable growth of low income housing in India. These projects are pending funding from sponsorsSustainability Elements in Low Income HousingThe creation of the low income housing market offers a rare opportunity to introduce a new set of environmentally sustainable elements in the market. If these elements are included in early projects that are commercially successful, they are likely to be replicated by future entrants in this spaceWe 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 propagate information about them.Developing a Paradigm for Low Income Rental HousingThere is a clear need for more and better quality rental housing, and there may be a commercially viable opportunity to provide such housingWe 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 rentals that the market can provide, regulatory issues, the potential of combining a rental model ownership 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 scaleFacilitating Broader Market Making InnovationsWe are also interested in exploring broader market making efforts such as:Developing Architectural BenchmarksDeveloping Low Cost Construction TechnologiesFacilitating the flow of long-term and low-cost debt to the sector, including warehousing facilities and options for securitizationIncluding Low Income Housing in SEZsWorking with financial institutions to lower the cost of service for low income customers
18 Monitor Group: An Introduction Founded by renowned academics, the Monitor Group has grown rapidly to become a leading global management consulting and merchant banking firmFounded by Michael Porter and other HBS faculty in 1983Renowned for focus on strategy and cutting-edge ideas that help clients growMichael Porter, Harvard Business SchoolDirector and Co-Founder of the Monitor GroupWe believe that “Ideas can create impact.”With over 25 offices across the globe, we go the last mile…CorporatesGovernmentsNon ProfitsGrowth StrategiesLeadership & InnovationPrivate Equity FundsCity StrategiesCluster DevelopmentCountry CompetitivenessSocial Venture FundsImpact InvestingEducation Ecosystem
19 Monitor Inclusive Markets in India An autonomous unit that is actively facilitating scaling of market based solutionsCustomersDevelopersFinancial InstitutionsConstruction TechnologyIdentifying and refining business models at scaleMaking the market for low income housing in India
20 LESS THAN TOP 16% of Urban Indian Households can afford to own houses Urban Housing Market 2007 Smallest house costs ~ Rs. 5 Lakhs (~ USD 10,000)Urban India — Expenditure & Income PyramidMultiple builders: “Three room” Rs 950 / sq. ft.Vatwa, 12 km from city centre; 40 minutes travel, NarodaLand rate of 80L to 1.1 Cr per acre available 45 minutes to 1 hour from city center, FSI of 1.8 given for 60% of the plot sizeMonthly IncomePotential to provide housing at Rs 800–Rs 1000 per sq.ft. However, overriding concern is financing of these housesMHE: >Rs 9,625 pm16% (10MM)Rs. 11,000USD 220MHE: Rs 4,575– Rs 9,625 pm37% (~23MM)JaipurRs. 5,000USD 100Ahmedabad / VadodaraMHE: Rs 2,500– Rs 4,575 pmMumbai33% (~21MM)Hyderabad1BHK flats (450–500 sq. ft.) being sold at Rs 900–1,200 per sq. ft. in areas such as Uppal, L B Nagar, Kuthapet, Kukatpalli etc. but not on a large scale.1RK flat at Karjat, (Mumbai suburb) being sold at Rs 999 per sqftLand rate of Cr per acre available in Titwala, FSI norm of 1Rs. 2,500USD 50MHE: <Rs 2,500 pm14% (~9MM)Current segment servedLESS THAN TOP 16% of Urban IndianHouseholds can afford to own housesSource: NHB Trends in Housing; CRIS Infac Report; Monitor Research
21 The opportunity: Smaller houses using current private sector construction practices Urban India — Expenditure PyramidCost Structure : Project IRR of 30 – 40%Monthly IncomeProject IRR 30-40%Operating ProfitabilityRsRs.sq ft. housesMHE: >Rs 9,625 pm16% (10MM)Rs 25-60Rs 10-25Rs 15RsRs. 11,000USD 220MHE: Rs 4,575– Rs 9,625 pmRs37% (~23MM)Rs. 5,000USD 100MHE: Rs 2,500– Rs 4,575 pm33% (~21MM)Rs. 2,500USD 50RsRs 25MHE: <Rs 2,500 pm14% (~9MM)LegalDesignConstruction CostsConstruction CostsInfrastructure CostsInfrastructure CostsMarketingSalariesInterestPBTTotalTarget segment for this projectPotential to provide housing for 15–21 Million urban householdsSource: NHB Trends in Housing; CRIS Infac Report; Monitor Research
23 All respondents were very interested in this concept Interest in Housing: Focus Groups Household Income – Rs. 6,700- 7,700/month ($ 140)Key is strong interest, proximity to facilities (e.g. schools, market places), connectivity via public transport and shared open spacesHousing Concept3 Tested with RespondentsCustomer Profile: Income: Rs. 7,000/monthMaximum Affordable Down PaymentRs. 70,000Housing Loan Tenure120 yearsCurrent Rent (Large City)Rs. 1,500 – 1,800 per month2Current Average SavingsRs. 700 – 1,000 per monthArea: Housing is within 1 hour of the city centre4Complex would comprise 6 buildings with 32 flats in each building (8 flats/ floor and 4 floors)Regular water and electricityNo lifts and single set of staircasesComplex would have a compound wall with shared open spaces including garden and play area for kidsClose to primary, secondary schools, healthcare centre and market placeWell connected to city by bus linkagesEach 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 bathroomWell painted walls and well ventilatedRs 300 per month as maintenance chargesAll respondents were very interested in this conceptMaximum Affordable EMI PaymentsRs. 2,450 / month (35% of monthly income)Maximum Affordable Housing Unit(Super Built Up)292 sq ft Rs. 2,92,000Note: 1Interest rate assumed to be 12%; 2Rent excludes electricity and water payments; 3Price for lower-income segment housing estimated at Rs. 900/sq ft 3Housing concept tested is based on examples of larger ( sq. ft) flats constructed in cities like Ahmedabad; 4The project team identified areas in the various cities where apartments could be constructed at property rates of Rs ,000 / sq. ft and these specific locations were tested with respondents
24 A Low Income Housing Finance Business: Outline The business will primarily focus on the urban customer in the Income Group Rs. 5,000-20,000 who does not currently have access to a home loanCustomer Profile and FocusGeography: 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 areasReach: The HFC will have an urban focus and will establish presence in Metros and surrounding Tier I/II/III citiesBranch: Hub and Spoke model with 55 branches by Year 10Target Monthly Household Income range: Rs. 5,000 – 20,000Customer groups: Both salaried customers who are unable to access home loans and informal sector customers, i.e. self-employed and salaried unorganized individualsProduct Offerings and Pricing StructurePrimary Product: Loan for home purchaseLoan Amount: 2 – 8 Lakhs: Families earning between Rs. 5,000 and 20,000 can afford homes costing up to 40 times their monthly income, i.e. Rs. 3 – 10 LakhsLoan to Value: 50 – 80%: A minimum of 20% equity from the customer will help mitigate the financier’s risk, while ensuring that the loan is not sub-primeInstallment-Income Ratio (IIR): %: This income group typically pays between % of their monthly incomes as rent, so a % EMI is feasibleLoan Tenure: 6 – 15 years: Will vary based on the customer’s incomePricing StructureAdjustable Rate Mortgages with typical interest rates between % based on down-payment amount, IIRs, loan Tenure, and perceived risk profile of customer; and allowing approximately a 3-4% spreadProcessing fee of 1% of loan value to re-cover loan origination and credit check costs
25 lA Low Income Housing Finance Business Customer Level Economics: Branch Level Revenue & CostsThe average cost to acquire a customer is Rs. 8,000 and cost to service their loan over the loan term is Rs. 20,000, while the net income earned per customer is Rs. 88,000Per Customer Cost AnalysisAssumptionsCost to Serve Per Customer (Rs.)Average Loan Size: Rs. 4 LakhsInterest Rate Charged: 14%Loan Processing Fee: 1%NPA: 1.0%1A 0.5% of loan value bonus is provided to the branch sales force as an incentive fee for each loan generatedThese assumptions are typical for most HFCs (our data is based on inputs from Dewan, GRUH, HDFC and MHFC)Legal & Technical clearanceLegal & Technical clearanceLegal & Technical clearanceSales IncentiveSales IncentiveOffice OverheadsOffice OverheadsDocumentation, Storage & RetrievalDocumentation, Storage & RetrievalDocumentation, Storage & RetrievalAverage NPAAverage NPAOperating OverheadsOperating OverheadsTotal Cost to ServeTotal Cost to ServePer Customer Revenue AnalysisIncome Earned PerCustomer (Rs.)ObservationsIt 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 customerNet Profit Per Customer Over 8 years (not including other costs) is approximately Rs. 56,000Net Interest IncomeProcessing FeeTotalNote: 1 DHFC and Gruh NPAs are less than 1%
26 A Low Income Housing Finance Business Profitability over a 10 year time frame The HFC will turn profitable after 3 years of operations, and it is anticipated that margins will grow sequentially in progressive yearsProfitability over a 10 year time periodAssumptions1Average Loan Tenure: 8 yearsCost of debt: 10%Debt Equity ratio:Year : 1Year : 1Capex in Years 1 to 3- Rs 3 Cr (towards software and hardware)NPA of 1 % provided on all loans disbursed from Year 4Net Profit/Loss = Post Tax (Income – Expenses)ROE = Net Profit/Loss / Average EquityROA = Net Profit/Loss / Average AssetsNet Profit/(Loss) (Rs. crores)180.3101.9Y1Y2Y3Y4Y5Y6Y7Y8Y9Y10Percentage ReturnObservationsReturn On AssetsReturn On EquityThe HFC will operate at a loss for the first few years, but will turn profitable by year 3ROE of 23% in year 10 is very robust by the Indian financial industry standardsROA of 3% in year 10 is comparable to HFC industry standards2.2-3.0-4.0-13.9Y1Y2Y3Y4Y5Y6Y7Y8Y9Y10Note: 1 Based on conversations with HFC Industry Experts and existing HFCs
27 Sub-prime Experience in USA Low-Income Housing in India Low Income Segments as Target Market Untested Risk Profiles, different from Sub-prime in USASub-prime Experience in USALow-Income Housing in IndiaVery high LTV; creative structures developed to reduce EMIsLoans extended without due consideration to ability to pay (basis employment history) – financing provided to those with questionable employment recordCost of asset disproportionately high compared to replacement cost; this is attributed to the real estate asset bubble in the US – hence high risk of payment default75-80% LTV – significant individual contribution required; EMIs tend to be 35% of Monthly IncomeTarget customers have regular employment, albeit with low income – with an unproven credit record which needs to be testedIn the low income segment, relatively low cost of land (esp. in peri-urban areas) leads to high correlation between cost of asset and replacement cost; and hence lower risk of asset bubblesOutcome: Sub-prime Defaults and ForeclosuresOutcome: Untested, relatively low-risk segment with significant business potential
28 300Low Income Housing as a Driver for Economic Growth Significant Employment Potential to Lower-Income SegmentsWithin the construction industry which is the largest employers of labor in urban India, affordable housing emerges as the most labor-intensive providing high potential for employment opportunity to the urban poorConstruction Laborer in IndiaComparison of spend on Labor in Construction Projects (as % of total Project Value)With 31 million workers (2005), the Construction Industry is the leading provider of employment to lower income segments in Urban IndiaA typical construction worker is from states with lower economic development (U.P., Bihar), a daily wage earner (income of ~Rs 100 per day), resides in temporary settlement near construction site and has been badly hit by inflation and slowdown in construction industryTraditional Housing ProjectLow Income Housing Project25075025%13%4003005503,0001,200Largest spend on labor4001,300250Capital2Raw MaterialRaw Material3LaborGross MarginGross MarginTotalCapitalRaw MaterialRaw MaterialLaborGross MarginGross MarginTotalNote:2 Includes land costs, design expenses and equipment costs; 3 Includes cost for steel, cement, tiles etc;Source: Construction Industry Development Council Report, Industry Experts, Monitor Analysis
29 Large Private Developers Medium and Small Private Developers Interviews with over 30 Housing Developers Interest in Low Income HousingLarge private developers are not interested in the segment unless it facilitates access to additional land for high end projects while some medium / small private developers are interested in serving the segment provided they get sufficient volumes and financing is available for customersLarge Private DevelopersMedium and Small Private DevelopersVery limited interest in building housing for low income customersDevelopers believe that there is still a large opportunity in housing for middle income and higher income segmentsRecognize land as an extremely valuable resource and consider stand alone low income housing projects as sub optimal utilization of available landNot willing to compromise on profit marginsBelieve that it is difficult to make housing at price affordable for low income segmentInterested in looking at housing for low income customers only if developing such housing helps them acquire land (from the government) for high end residential and commercial projectsWilling to cross subsidize low income housesBelieve that there is high competition in the middle segments and market is saturatingSome medium and small developers recognize the opportunity in low income housing are interested in looking at the segmentBelieve they have the management capabilities for taking on such additional projectsBelieve that it is viable to serve this segment while earning close to their current margins (20-30%)However, need comfort that they will get sufficient volumes from this segment; concerned about non availability of housing finance to the segmentSome developers have also expressed interest in being part of a pilot project
30 Financial Institutions: Current Market Focus The target segment is largely un-served – select medium sized HFCs and banks have a small presence among customers (primarily salaried) with household income above Rs. 5,000 per monthSalaried (Organized)Self Employed & Salaried (Unorganized)Large Private and Government Banks, Large Housing Finance CompaniesBanks typically treat the unorganized salaried segment as part of self employed> Rs. 10 KLarge Private and Government Banks, NBFCsSelect Medium Sized Housing Finance Companihes, Co-op Banks, NBFCsRs. 8K – 10 KGovernment Banks, Medium Sized HFCs, Co-operative Banks, NBFCs (Select players, small % of portfolio)Rs. 5K – 8K 1Shaded portion represents un-served customer segmentsTarget Segments for the ProjectRs. 3K – 5KLimited MFIs (Home repair / extension loans)Rs. 2.5K – 3KNote: 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
31 New Housing Business Model: Salaried Sector The new product for those employed in formal sector settings required several reconfigurations of existing products and practices, with a direct link to customer employersCurrent Bottom of the Market (12k–20k)Alternative Model — Serves 6k–12k MarketNo construction finance (concern on buyers / delays)Developer (Small and Medium)Developer (Small and Medium)Construction FinanceUncertainty of SalesSales and Mktg. costsFunding constraintEmployerFinancial InstitutionEmployerFinancial InstitutionAffordable sq ft units, good quality, no delaysUpfront, financed, aggregated customersRetention toolHigh productivityRetention issuesDeveloper puts 500 sq.ft.+ apartments on market in phases (3–4 years) and gets individual, walk in customersAggregated low risk, low cost to serve customersServe 1 customer at a time, won’t finance below Rs. 12,000/monthPayroll deductionFacilitates aggregation and information on customersLoans at affordable ratesFormal Sector CustomersFormal Sector CustomersRisk of DelaysOpportunity to Set Standards:Architectural Design, Maintenance, Consumer Education
32 New Housing Business Model: Informal Sector The new product for those employed in informal sector settings may require the introduction of MFIs as an aggregator and potentially a credit guarantor to incentivize financingCurrent Bottom of the Market (12k–20k)Alternative Model — Serves 6k–12k MarketCredit GuaranteeNo construction finance (concern on buyers / delays)ConstructionFinanceDeveloper (Small and Medium)Developer (Small and Medium)Uncertainty of SalesSales and Mktg. costsFunding constraintFinancial InstitutionFinancial InstitutionAffordable sq ft units, good quality, no delaysUpfront, financed, aggregated customersRepossession of bad debtDeveloper puts 500 sq.ft.+ apartments on market in phases (3–4 years) and gets individual, walk in customersFinancial return with aligned incentivesAggregated customersPotentially low riskLow cost to serveLoan at affordable ratesOften will not financeCustomersInformal Sector CustomersMFIRisk of DelaysAggregated customersUse of tools such as rolling guarantee to reduce riskCredit check, collection, consumer education
33 Summary of Various Affordability Levers Various quantifiable affordability levers significantly differ from each other in terms of impact on affordability and feasibilitySmall Sized HousesFSI IncreaseLow Cost ConstructionBulk Material PurchaseTax Concessions1Stamp Duty Exemption to CustomerLonger Tenure LoanLand SubsidyStamp Duty and Registration waiver on LandSubsidized Construction materialRegistration Fee s Waiver to CustomerInterest SubsidySemi Finished ConstructionIncome tax Exemption to DeveloperFeasibilityHighMediumLowNote: 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
34 Monitor’s Value Proposition to Developers Support provided across the affordable housing value chainBusiness BlueprintProject implementationSales and MarketingBusiness Planning and Organization DesignFinancingLand selection and validationDesign and DevelopmentProduct mix and pricingSales process designTraining of client teamAccess to housing financing companiesDevelopment of business plan including strategyOrganization design and structureRoles and responsibilitiesIdentification of functions that can be outsourced/inhouseProject/Business EconomicsSensitivities of plan to approval process, construction costs and time, sales efficiencies, etcAccess to targeted financing for specific projectsAccess to double-bottomline funds for investment at a business levelAccess to PE funds interested in investing in affordable housingDeveloping list of attractiveness criteria as well as inhibiting features to evaluate areas for determining ‘buy’ decisionValidation of selected land parcelsFacilitating site visits by potential customers to determine attractiveness and demand.Databank of unit layouts (Lower cost and increase value to customer)Improve mix of commercial and residential to improve returnsDatabank of site layouts to incorporate open, green spaces, max FSI, etc.)Project phasingDeveloping optimal product mix given FSI norms and desired returnsDifferential product pricingStrategy to reach out to different sets of customersBuilding the sales process from the time a customer walks in to the project until the time possession is handed over to the customer.Templatize processesStructure team in order to achieve long term competencies in sellingTrain team to be able to do this at scale across projectsWork with banks, MFIs and specialized institutions to enable access to financing options for customers at booking stageTie-ups with financial institutions for both formal and informal sector customersAccess to Monitor NetworksEnd-to-end handholding : Base IP and customized application; Decision support and overall knowledge
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