Low Income Housing: State of the Market April 2013 Deloitte Consulting LLP

2 CAS-COD-Prez-Date-CTL Copyright © 2013 Deloitte Development LLC. All rights reserved. State of the Market – June 2013 ACTIVITIES Extensive ground research, effort of more than 300 man-days, in 8 large urban centers to scan for sub-10 lakh housing In-depth discussion with more than 25 developers spread across the country In-depth discussion with all prominent Housing Finance players in the LIH ecosystem ACTIVITIES Extensive ground research, effort of more than 300 man-days, in 8 large urban centers to scan for sub-10 lakh housing In-depth discussion with more than 25 developers spread across the country In-depth discussion with all prominent Housing Finance players in the LIH ecosystem OUTPUT Estimate and characteristics of sub-10 lakh supply in large urban centers Benchmarking business practices across players Best practice case studies from the field Customer insights from MIMs Unintended Consequences and Demand Aggregator studies will be integrated with this report OUTPUT Estimate and characteristics of sub-10 lakh supply in large urban centers Benchmarking business practices across players Best practice case studies from the field Customer insights from MIMs Unintended Consequences and Demand Aggregator studies will be integrated with this report Increasing Supply Building a Robust Industry Key Objectives of the SOM Report Reduce the entry barriers for new players & Insights for existing Provide government and other stakeholders with a fact base to define and refine policy and strategy Share best practices from the industry; rovide existing players with peer comparisons Feedback from the field on challenges and what is working

3 CAS-COD-Prez-Date-CTL Copyright © 2013 Deloitte Development LLC. All rights reserved. Good Performance of HFCs : High Growth & Low NPAs Company/ Organization Size of Loan Book 1 (FY 12, INR Cr) % Portfolio <10 lakhs Average Ticket Size NPAsSpreads MHFC40100%Rs. 4.2 lakhsNILNA MAS30100%Rs. 4.5 lakhsNA DHFL19,35567%Rs lakhs0.68%2.78% 3 Muthoot2370%Rs lakhs<0.1%NA Shubham31100%Rs. 5.5 lakhs<0.1%4% ISFC40100%Rs 1.45 lakhs 2 <0.1%NA Selected HFCs Serving Low-Income Customers Note: 1 Outstanding Loan Portfolio as of March For Muthoot, MHFC the data is as of June An approximate figure has been used for Shubham. 2 As of Dec Net Interest Margin as of Q3 FY12 Source: Annual Reports, Management Conversations, Monitor Analysis

4 CAS-COD-Prez-Date-CTL Copyright © 2013 Deloitte Development LLC. All rights reserved. Key Insights HFCs are serving different Market Segments Note: This market map indicates primary activity of select housing finance companies Source: Management Interviews, Monitor Analysis & Research New Resale Incremental Self-construction (Single units) Small Developer (Typically <20 units) Mid-Large Dev. (>50 units) Type of Purchase (INR 2-12 Lakhs) Type of Developer No Housing Activity Here Representative Low-income Housing Finance Market Map – India, 2013 No Housing Activity Here

5 CAS-COD-Prez-Date-CTL Copyright © 2013 Deloitte Development LLC. All rights reserved. * Initial results, the number here is an estimate of the number of projects which were launched post June 2011 Note: 1 Estimate for Mumbai based on initial results; 2 Nagpur includes one project from Amravati; 3 Delhi NCR includes Meerut Mumbai Delhi NCR Chennai Ahmedabad Pune Bangalore Nagpur Key Insights LIH Landscape Market has become deeper with an increase in the number of developers building in existing markets; LIH activity has sprung up in new cities as well, especially Indore. xx Number of active projects Mumbai 1 Delhi NCR 3 Jaipur Indore Chennai Ahmedabad Kolkata Hyderabad Bhubaneswar Nagpur Surat 2 Baroda 1 Coimbatore 1 Lucknow 1 Trichy May 2010 (27 Projects) Jan 2013* (103 Projects) Cities where detailed survey was conducted

6 CAS-COD-Prez-Date-CTL Copyright © 2013 Deloitte Development LLC. All rights reserved. Key Insights Sample Findings from Indore Very active LIH market dominated by 1 BHK units. Industrial development activity in the southern part of the city driving supply. Small developers are also quite active in Indore Average PSF 1,573 1,150 2, sq-ft592 sq-ft806 sq-ft Average Saleable Area and Product Mix Note: Indore: n = 28 (projects); 1 : Supply from large developers (>50 units in a projects) only, launched post June 11 Source: Survey conducted by Hansa Research; Monitor Analysis 4,474 1 LIH Units 6 only LIH projects 22 mixed development projects Betma Road 2 Bicholi 6 Kanadiya Rd. 2 Khandwa Rd. 5 Rau Pithampura 5 Chhota Bangarda 4 Manglia 3 Samvad Nagar 1 xx # of projects 1 RK1 BHK2 BHK 15%76%9%

7 CAS-COD-Prez-Date-CTL Copyright © 2013 Deloitte Development LLC. All rights reserved. Key Insights Challenges in LIH Supply Long & Expensive Approval Process Developers claim that for large projects it often takes anywhere between 9-24 months for the combined land and project approvals, which has an impact on construction timelines, project IRRs and unit pricing In addition, the cost of approvals can be as high Rs psf in certain cases Realizing the difficulty, we have seen certain developers build on gram panchayat land or adopt G+3 structures to by-pass the lengthy approval process Rising Construction Costs According to developers across cities, their construction costs have increased by 15-20% on yearly basis LIH is a low-margin business and such high inflation has forced several developers to book loss on their LIH projects –High inflation also makes it difficult for developers to build their business plans as there is uncertainty over the eventual project cost Availability of Affordable Land Availability of well-connected affordable land still remains a concern in some cities However, in some cities, infrastructure development has opened up new areas and developers in these cities dont see land as their biggest problem

8 CAS-COD-Prez-Date-CTL Copyright © 2013 Deloitte Development LLC. All rights reserved. Key Insights Positive Developments There have also been some positive developments on the government side which should drive the field further forward –Rajasthan Housing Boards efforts to provide quality housing for EWS and LIG segments in Jaipur –Gujarat governments recently announced intention to reserve 2km area in peripheral areas of Ahmedabad for LIH –Orissa governments recent engagement with private developers to come up with a policy for LIH that serves the needs of urban poor

9 CAS-COD-Prez-Date-CTL Copyright © 2013 Deloitte Development LLC. All rights reserved. Key Insights Challenges and potential interventions Customer challenges Inadequate supply of low-income housing Customers lack of awareness on affordability, payment terms, legal clearances, and rights Customers have limited access to legal recourse Delay in possession leading to payment of rent and EMI simultaneously Developer challenges Approval processes for developing projects are time consuming Affordable land is often not well connected to transportation and/or public services Construction finance/funding is not easily accessible Housing finance companies challenges High cost of debt Customers Customer challenges Inadequate supply of low-income housing Customers lack of awareness on affordability, payment terms, legal clearances, and rights Customers have limited access to legal recourse Delay in possession leading to payment of rent and EMI simultaneously Developer challenges Approval processes for developing projects are time consuming Affordable land is often not well connected to transportation and/or public services Construction finance/funding is not easily accessible Housing finance companies challenges High cost of debt Customers Potential interventions 1.Provide interest rate subsidy to low- income customers 2.Waive VAT, stamp duty and registration fees for low-income customers 3.Mandate zones for low-income housing 4.Provide fast approvals for projects 5.Build infrastructure to increase serviced land 6.Provide FSI of for affordable housing 7.Kick start privately built low-income housing in new geographies 8.Increase availability of low-cost funds to housing finance companies Potential interventions 1.Provide interest rate subsidy to low- income customers 2.Waive VAT, stamp duty and registration fees for low-income customers 3.Mandate zones for low-income housing 4.Provide fast approvals for projects 5.Build infrastructure to increase serviced land 6.Provide FSI of for affordable housing 7.Kick start privately built low-income housing in new geographies 8.Increase availability of low-cost funds to housing finance companies

10 CAS-COD-Prez-Date-CTL Copyright © 2013 Deloitte Development LLC. All rights reserved. Theory of Change for Financial Inclusion Access to suitable financial services Capability and confidence in using financial services appropriately Utilisation of financial services to sustainably meet life needs, build assets, grow incomes and manage risks Improved life situation facilitated by financial inclusion MIM is also studying the effectiveness of Micromortgages – as a tool for financial inclusion; we are using a theory of change framework to evaluate its effectiveness Appropriate design, easy accessibility, and competitive pricing are key product inputs Capability is not a one-time input. Usage can be increased by providing for continuous capability improvements of the user Source: Monitor Analysis Key Insights Some Other Aspects

11 CAS-COD-Prez-Date-CTL Copyright © 2013 Deloitte Development LLC. All rights reserved. By improving access and building capability, micromortgages have improved customers live by helping to create an asset and influencing positive financial behaviour Monthly EMI payments promotes financial discipline Increased confidence in navigating formal institutions to fund major needs Theory of Change for Financial Inclusion – Micromortgages Access to suitable financial services Capability and confidence in using financial services appropriately Utilisation of financial services to sustainably meet life needs, build assets, grow incomes and manage risks Improved life situation facilitated by financial inclusion Educative product information by loan agents helps build awareness However, experience based learning through micromortgages is more effective in building long-term capability Flexible customer assessment model that addresses accessibility issues Increased awareness of options due to: –Prevalence of specialist HFCs –Developer tie-ups with HFCs Enables building of asset base through house ownership Openness to formal loans reduces exposure to informal lending and its risks Key Insights Micromortgages as a Tool for Financial Inclusion

12 CAS-COD-Prez-Date-CTL Copyright © 2013 Deloitte Development LLC. All rights reserved. State of the Market Report – JUNE For any questions, please contact any one of us Vikram Jain – Namrata Kapoor – Darsh Maheshwari – Ashish Karamchandani – Aditya Agarwal –

13 CAS-COD-Prez-Date-CTL Copyright © 2013 Deloitte Development LLC. All rights reserved. Backup

14 CAS-COD-Prez-Date-CTL Copyright © 2013 Deloitte Development LLC. All rights reserved. Key Insights Sample Findings from Ahmedabad Note: Ahmedabad: n = 17 (projects); Supply from large developers (>50 units in a projects) only, launched post June 11 Source: Survey conducted by Hansa; Monitor Analysis Presence of a highly evolved LIH market with supply being driven by 1 RKs; Presence of sophisticated developers who have a deep understanding of the segment. Average PSF 1,542 1,200 1, sq-ft647 sq-ft855 sq-ft Average Saleable Area and Product Mix 4,713 1 LIH Units 5 only LIH projects 12 mixed development projects 1 RK1 BHK2 BHK 50%45%5% Nikol 4 Vastral 1 Hathijan 1 Narol 2 Moraiya Gam 2 Bavla 5 Juhapura 1 xx # of projects

15 CAS-COD-Prez-Date-CTL Copyright © 2013 Deloitte Development LLC. All rights reserved. Key Insights Challenges in LIH Supply Despite the increase in LIH activity, the supply still remains a challenge and several fundamental barriers remain for this market to scale at rapid pace Long & Expensive Approval Process Developers claim that for large projects it often takes anywhere between 9-24 months for the combined land and project approvals, which has an impact on construction timelines, project IRRs and unit pricing In addition, the cost of approvals can be as high Rs psf in certain cases Realizing the difficulty, we have seen certain developers build on gram panchayat land or adopt G+3 structures to by-pass the lengthy approval process Rising Construction Costs According to developers across cities, their construction costs have inflated by 15-20% on yearly basis LIH is a low-margin business and such high inflation has forced several developers to book loss on their LIH projects –High inflation also makes it difficult for developers to build their business plans as there is uncertainty over the eventual project cost Availability of Affordable Land Availability of well-connected affordable land still remains a concern in some cities However, in some cities, infrastructure development has opened up new areas and developers in these cities dont see land as their biggest problem

16 CAS-COD-Prez-Date-CTL Copyright © 2013 Deloitte Development LLC. All rights reserved. Key Insights Potential interventions Demand interventions Provide interest rate subsidy to low-income customers Waive VAT, stamp duty and registration fees for low- income customers Supply interventions Mandate zones for low-income housing Provide fast approvals for projects Build infrastructure to increase serviced land Provide FSI of for affordable housing Kick start privately built low-income housing in new geographies Increase availability of low-cost funds to housing finance companies