FINANCING REAL ESTATE AND HOUSING: THE INDIAN PERSPECTIVE Keki Mistry Managing Director, HDFC FICCI: “Global Banking: Paradigm Shift” October 6, 2005

Background on HDFC First specialised mortgage company in India established in 1977 Loan Approvals Rs. 914 billion (upto Jun 2005) (US $ bn)Loan Approvals Rs. 914 billion (upto Jun 2005) (US $ bn) Loan Disbursements Rs. 759 billion (upto Jun 2005) (US $ bn)Loan Disbursements Rs. 759 billion (upto Jun 2005) (US $ bn) Housing Units Financed 2.6 millionHousing Units Financed 2.6 million Distribution Outlets 300

Growth in demand - driven by improved affordability –Rising disposable income –Low interest rates –Generally stable property prices –Fiscal incentives on both interest and principal repayments Increasing urbanisation Increased number of players Housing shortage of 19.4 m units –12.7 m units in rural areas – 6.7 m units in urban areas Housing Market Scenario

Improved Affordability Property price estimates in suburban Mumbai Affordability equals property prices by annual income 1 Lac = 1,00,000

Effective Rates On Home Loans

Mortgages as a % of GDP 3% 9% 13% 23% 36% 37% 49%51% 0% 10% 20% 30% 40% 50% 60% India Thailand Korea Malaysia Singapore Taiwan Hong Kong USA 54% UK 48% Germany 70% Denmark

Housing Shortage Source : NBO, Usable Housing Stock & No of Households (Million) Shortfall (Million)

Increasing Urbanisation Trends Population Projection: Source: Census Population Figures

Typical Profile of a Customer Single largest investment in his/her life time Typically first time borrowers Besides finance, looks for advice on legal and technical issues Debt adverse nature Generally salaried class individuals Preference for floating rate loans Increased competition has meant more choices for the customer

The Indian Real Estate Market: Contribution to the Economy Second largest employment generator in the country –Construction sector provides employment to 16% of the workforce – growing at the rate of 7% p.a. –Over 55% are in the unskilled category Estimated that for every rupee invested in construction, 78 paise is added to the GDP Real estate is a growth engine for development of over 269 allied industries Real estate growth gives boost to construction, steel and cement sectors

Real Estate Segmentation –Housing Housing for consumers Employee/staff housing –Non-housing Offices Manufacturing plants Malls, Retailing, Multiplexes Hospitals/Educational institutes Agricultural estates Government owned real estate

Non-Housing Real Estate Market Greater thrust in recent years towards intellectual capital and services Post 1998: IT & ITES changed the face of real estate development There is a gravitation of corporates away from main cities towards the outskirts, secondary business districts Public private partnerships Development of other infrastructure facilities

Non-Housing Real Estate Market Developers are building properties and leasing out the same to consumers Developers also borrow by discounting lease rental receivables Several multinational companies prefer the leasing route

Opportunities Growth drivers –Call centres and BPOs –Family entertainment centres Multiplexes Retailing Restaurants and beverage chains –Biotech units –Pharmaceuticals (R&D centres) Venture capital funds permitted to invest in real estate

Policy Measures Needed for Real Estate Tax Reforms to be implemented –Reduce stamp duty and registration charges Government will collect more revenues Litigations would reduce as registrations increase People will invest more into properties providing liquidity to the market –Rationalise property taxes

Policy Measures Needed for Real Estate Repeal ULCRA - many states yet to do so Tedious building approval processes Encourage single window clearance for land development permissions Computerisation of land records and simplification of land transactions Need to establish a management information system to monitor building activity

Securitisation Will be an important source of funding going forward Benefits include diversity of funding sources, improving capital allocation efficiency, asset- liability management, moving assets off the balance sheet Current Drawbacks: –The Securities Contract Regulation Act does not recognise MBS and ABS as “securities”, hence not listed –Lack of secondary market trading –Need for market makers –Need to rationalise stamp duties Stronger foreclosure norms and introduction of mortgage insurance will help deepen the market

Role of Developers Developers need to corporatise themselves Increase transparency in terms of financial disclosures Need to adhere to a code of ethics World over property developers are listed –Increases credibility –Access to more funds

The Future Private capital imperative to create permanent and supportive housing solutions Smaller housing finance institutions may need to re-orient their role as originators Further development of the secondary mortgage market Effective foreclosure norms will help increase risk appetite Access to long-term pension/provident funds Real Estate Mutual Funds Mortgage Insurance

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