Day 1 Session 4: International & Country … Alliance Project Output Day 1 Session 4: International...

Cities Alliance Project Output

Day 1 Session 4: International & Country Perspectives on Financing, Upgrading

and Affordable Housing (Monitor Group)

India International Workshop: Scaling up Upgrading and Affordable Housing: From National Policies, to State Programs,

and City-Wide Slum-Free Interventions

P120776

This project output was created with Cities Alliance grant funding.

January 27th, 2010

A Market Based Approach to Low Income Housing : Commercial Viability of Supply

Based on a Project for National Housing Bank, with active support from World Bank and funded by FIRST Initiative

Implementation support by IFC and Michael & Susan Dell Foundation

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 otherwise — without 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

SÃO PAULO

SEOUL

SHANGHAI

SINGAPORE

TOKYO

TORONTO

ZURICH

2 0 0 9

Confidential

Copyright © 2008 Monitor Company Group, L.P. — Confidential2

Note: 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

Leading developers (DLF, Unitech) Highly competitive, slowing demand

growth due to increasing prices and high interest costs

Price of unit2 > INR 25 Lakhs Potential demand from ~2 M HHs with

estimated Market Size:of ~INR 500,000 Cr Various mortgage finance options available

for 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 many large players (e.g. Omaxe, Ansals, Lodha, MAYTAS, Purvankara, etc.)

Offering & Market Potential

Price of unit: INR 10–25 Lakhs Potential demand from ~5 M HHs with

estimated 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)

10000–20000

>80000

30000–40000

<5000

40000–80000

31%(21.1MM)

5%(3.4MM)

5000–10000

20000–30000

MHI1(INR)

Price of House: INR 3–10 Lacs Potential demand from ~21 M HHs with

estimated Market Size ~INR 1300,000 Cr Finance available for MHI > INR 12K in the

formal sector, limited availability below MHI of INR 12K; negligible availability to the informal sector

Presence of urban development bodies (DDA, MHADA)

Nascent presence of scale private developers (TMC, Tata, Homex)

Confidential

Copyright © 2008 Monitor Company Group, L.P. — Confidential — MUM3

Live in poorly constructed small cramped houses

Poor sanitary conditions -shared toilets, bad drainage, water logging during monsoons

Lack of facilities -properly planned access points, walkways, gardens, dedicated schools etc.

Appalling conditions of Slum-Dwellers

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 unsuccessful

Steady job as a factory worker in a textile enterprise in Ahmedabad

Monthly HH income ~ Rs 8,000, ($160) savings up to 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 to Rs 1000 ($ 20) p.m.

Lives in 150 sq. ft. room in slums, Rent Rs 2,400 ($ 48)

Married with 2 children Assets – Bank Account, LIC (Rs 1.5L),

Refrigerator and PC Education: Both children attend

English-medium school Rent: Has seen significant & frequent

increases in rent, has moved house 5 times in 12 years

Profile - Ganesh

Both share a dream…“A house of their own”Can 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 income neighborhood, Rent Rs 1800 ($ 36)

Family size: 5 (mother, wife, 2 children) Assets – Bank Account, LIC (Rs 3L), TV Education: Both children attend private

Gujarati medium schools Rent: Increased by 50% in past 3 years,

has moved every 2 to 3 years

Confidential


Low Income, not Low Cost or Low Quality

Confidential


Project details UOMKey

NumbersOption With Land Cost / No Revenue ShareTotal Land size 10 sq. ft. 435,600FSI allowed 1.80 Total area available for construction sq. ft. 784,080Area 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 476,799Mix of Houses - Area % of number

1 RMK 29% sq. ft. 2201 BHK – Type 1 32% sq. ft. 3001 BHK – Type 2 40% sq. ft. 400

Loading Factor for Saleable Value 25%Mix of Houses - Base Price in Phase 1

1 RMK INR/sq. ft. 11001 BHK – Type 1 INR/sq. ft. 12001 BHK – Type 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 from project Revenue from different Sources

Commercial (Rs) INR 9.45Residential (Rs) INR 89.76

Overall Realization of the Project (Rs. Crores) 99.21 Costs from different Sources

Cost of land INR cr. 15.7

Construction CostINR cr. 62.7

Sales and Marketing INR cr. 3.0

Overall 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 flats• Price is constant over the duration of the project• The 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 2• The mix of flats is such as to allow some area to

be sold at a higher price point • Cost of construction is Rs. 800 per square foot

(comparable to other estimates for such projects based on our experience)

• Land is owned by the developer

An Alternate Business Model – Land as InventorySample Project Economics: Margin – 22%, IRR – 40%

Confidential


Conveying the opportunity Arranging 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 of

stakeholders (over 400)

RAISING AWARENESS

Existing 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.

BUILDING THE ECOSYSTEM

Two years, 600 developers, and downturn in the economy to:1) Achieve a clear recognition in the market of the opportunity2) Lead to a number of players in this space

SMALL DEVELOPERS AND NEW

PLAYERS

END TO END SUPPORT

Confidential


Market demonstration of Demand: Private sector projects across India

Ahmedabad: Vatva

Taral BakeriPhase 1: 800 unitsConstruction start: June 2009Price: Rs 3.3 lakh– 5.6 lakh

Mumbai :AmbiviliNeptune 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: KarjatTMC – Matheran Realty

15,000 units by June 2011;3,000 units in Phase 1 – June ’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: AtibeleJanadhar11 acres: 1500 units1BHK and 2 BHK; Rs 4 lakhand 6 lakh Bangalore: Value Budget Housing

Rs 3-9 lakh townships on minimum 10 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)

Confidential


Entry by potential scale players

Tata Housing

Launched a low income housing township in Boisar, 98 kms from South Mumbai

Spread over 67 acres and has 1,000 flats in the first phase

1 RMK 283 sq. ft and 1 RMK with 360 sq. ft.

Flats priced between Rs. 3.9 lakh and Rs. 6.7 lakh

Value Budget Housing Development Corporation

Jerry Rao (founder, MphasiS) and P.S. Jayakumar (ex Citibank) set up housing development company

Large business opportunity with significant social impact

Goal: 1 Million homes in urban India in price range of Rs. 3-9 lakh in next decade

The company has partnered with Monitor to test feasibility of vision, provide in-depth knowledge of the market and assist in building the organization structure

Tanaji Malusare City

Launched by Matheran Realty Pvt. Ltd. in Karjat

Aims to create large scale commercially viable housing for low‐income households

66,000 applications for sale of 3,000 units in Phase 1.

Will contain 15,000 flats 1‐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 lakh

Confidential


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 Tier I/II/III cities

Branch: Hub and Spoke model with 55 branches by Year 10

Target Monthly Household Income range: Rs. 5,000 – 20,000

Customer groups: Both salaried customers who are unable to access home loans and informal sector customers, i.e. self-employed and salaried unorganized individuals

Customer Profile and

Focus

Product Offerings and

Pricing Structure

Primary Product: Loan for home purchase

Loan 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 Lakhs

Loan 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-prime

Installment-Income Ratio (IIR): 30 - 40%: This income group typically pays between 20 - 25% of their monthly incomes as rent, so a 30 - 40% EMI is feasible

Loan Tenure: 6 – 15 years: Will vary based on the customer’s income

Pricing Structure

Adjustable Rate Mortgages with typical interest rates between 11 - 15% based on down-payment amount, 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 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 loan

Confidential


Per Customer Cost Analysis

A 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. 88,000

Cos

t to

Serv

e Pe

r Cus

tom

er (R

s.)

Inco

me

Earn

ed P

er

Cus

tom

er (R

s.)

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 branch sales force as an incentive fee for each loan generated

These assumptions are typical for most HFCs (our data is based on inputs from Dewan, GRUH, HDFC and 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 including other 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

Sales Incentive

Office Overheads

Average NPA

Documentation, Storage & Retrieval

Legal & Technical clearance

Total Cost to Serve

Operating Overheads

88,0004,00084,000

010,00020,00030,00040,00050,00060,00070,00080,00090,000

Processing FeeNet Interest Income Total

Per Customer Revenue Analysis

Confidential


Profitability over a 10 year time period

A Low Income Housing Finance Business Profitability over a 10 year time frameThe HFC will turn profitable after 3 years of operations, and it is anticipated that margins will grow sequentially in progressive years

Net

Pro

fit/(L

oss)

(Rs.

cro

res)

Perc

enta

ge R

etur

n

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 (towards software 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 few

years, but will turn profitable by year 3

ROE of 23% in year 10 is very robust by the Indian financial industry standards

ROA of 3% in year 10 is comparable to HFC industry standards

276.9

52.627.316.05.60.8-1.2-2.8

-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

23.022.019.0

17.0

13.010.0

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 EquityReturn On Assets

Copyright © 2009 Monitor Company Group, L.P. — Confidential — IND12

Affordable Housing

Low Income Housing as a Driver for Economic GrowthWide Range of BenefitsMarket based affordable housing can be part of a broader portfolio of solutions to housing for the poor and lower income groups

Aiding Overall Economic Development

Construction of low income housing provides disproportionate job creatiion

Creates signficant economic value for state (taxes, anxiliary economic activity, source of labor potentially leading to industry, etc

Provide alternative to Urban Slums ~40M people live in urban slums without basic

facilities 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 infrastructure

within a cityBenefits for families of Urban LIG

Housing is essential for the well-being of a family

Enhanced security and health through organized housing with access to sanitation

Access to better services (schools, healthcare etc.) which are typically available to higher-income groups

Creation of Low-Risk Asset for Families Long term wealth creation due to value of

asset, “saving on rent” & collateral for loan A “security net” in crisis Low income houses typically built on land with

low cost per sq. ft. Low likelihood of price depreciation, Hence downside risk is low

Allows Government funds to focus on poor

Limited government resources can be spent on rental and owned housing for poorer sections of society

Sets benchmarks that can be used for housing for the poor

Copyright © 2009 Monitor Company Group, L.P. — Confidential — IND13

Our path forward: Monitor’s 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

Facilitating Consumer

Finance

Ensuring Supply of Housing (Distinct Business 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 of each option and the situations where it would be effective

Working with the central Government and nodal agencies like NHB to transfer this knowledge to local decision makers.

Supporting Government Scale

up Low Income Housing

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.

Facilitating Broader Market

Innovations

Confidential


Back-up

Confidential


Key Challenges and Critical Success Factors

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 space

Most developers are building ‘affordable’ homes that cost between Rs. 10-20 Lakhs, but the real need 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 scale development of this market

There 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 interest

New 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 serve

Facilitating Consumer

Finance

Ensuring Sustained Supply of Housing in

the Rs. 3-7 Lakhs Range

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 India

While the government is interested in stimulating private sector led approaches to low income housing, 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

Supporting Government Scale

up Low Income Housing

The 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.


Innovations

Confidential


Facilitating Supply of Housing for Low Income Customers

Due 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 space

Most developers are building ‘affordable’ homes that cost between Rs. 10-20 Lakhs, but the real need 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 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 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 group sessions on areas like ways to lower cost of construction, sustainable elements, etc)

Approach

Challenge

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 market

Confidential


Facilitating Consumer Financing for Low Income Customers

Access to home financing for low income customers remains the major choke point to the scale development 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 is currently 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 key

challenges 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 this market

– Help 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.

Approach

Challenge

We would like to extend access to home financing to low income customers, especially informal sector workers

Confidential


Supporting the Government to Scale Low Income Housing

The 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 so

They are concerned that the private sector will enter this segment to make large profits, and benefits 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 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 environments

Work with the central Government and nodal agencies like NHB transfer this knowledge to local decision makers

Support a few ULBs on implementing these options and use this learning to refine the options

Preferred Approach

Challenge

We would like to work with central and state governments to devise ways to incentivize the private sector to provide access to low income housing

Leverage 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 housing Follow up with interested ULBs/States to raise awareness among developers in their

geography 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 education modules

Short Term Approach

Confidential


Development and Facilitation of ‘Market Innovations’

The 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 segment Create modules in a format that is easily accessible to target segments – i.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 will be a customer finance module (in discussion with FMO about funding)

The 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 houses– Follow 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 practices– Provide 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

Monitoring, Evaluating, and Spreading Best

Practices/ Addressing Unintended

Consequences

Development and Dissemination of

Customer Education Modules

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

Confidential


Development and Facilitation of ‘Market Innovations’

The 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 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 propagate information about them.

Sustainability Elements in Low Income Housing

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 sponsors

There is a clear need for more and better quality rental housing, and there may be a commercially 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 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 scale

Developing a Paradigm for Low

Income Rental Housing

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

facilities and options for securitization Including Low Income Housing in SEZs Working with financial institutions to lower the cost of service for low income customers


Making Innovations

Confidential


Monitor Group: An Introduction

Michael Porter,Harvard Business SchoolDirector and Co-Founder

of the Monitor Group

Founded by renowned academics, the Monitor Group has grown rapidly to become a leading global management consulting and merchant banking firm

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 that help 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 Strategies• Cluster Development• Country

Competitiveness

• Social Venture Funds• Impact Investing• Education Ecosystem

Confidential


Monitor Inclusive Markets in India

An autonomous unit that is actively facilitating scaling of market based solutions

Customers

Developers

Financial Institutions

Construction Technology

Identifying and refining business models at scale

Making the market for low income housing in India

Confidential


Urban Housing Market 2007Smallest house costs ~ Rs. 5 Lakhs (~ USD 10,000)

Source: NHB Trends in Housing; CRIS Infac Report; Monitor Research

Urban India — Expenditure & Income Pyramid

16%(10MM)

37%(~23MM)

33%(~21MM)

14%(~9MM)

MHE: <Rs 2,500 pm

MHE: Rs 2,500–

Rs 4,575 pm

MHE:Rs 4,575–

Rs 9,625 pm

MHE: >Rs 9,625 pm

Monthly Income

Rs. 11,000

USD 220

Rs. 2,500

USD 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 acre

available 45 minutes to 1 hour from city center, FSI of 1.8 given for 60% of the plot size

1RK flat at Karjat, (Mumbai suburb) being sold at Rs 999 per sqft

Land rate of 0.6 -1.2 Cr per acre available in Titwala, FSI norm of 1

Potential to provide housing at Rs 800–Rs 1000 per sq.ft. However, overriding concern is financing of these houses

1BHK 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.

Confidential


The opportunity: Smaller houses using current private sector construction practices

Source: NHB Trends in Housing; CRIS Infac Report; Monitor Research

Urban India — Expenditure Pyramid

16%(10MM)

37%(~23MM)

33%(~21MM)

14%(~9MM)

MHE: <Rs 2,500 pm

MHE: Rs 2,500–

Rs 4,575 pm

MHE:Rs 4,575–

Rs 9,625 pm

MHE: >Rs 9,625 pm

Monthly Income

Rs. 11,000

USD 220

Rs. 2,500

USD 50

Rs. 5,000

USD 100

Target segment for this project

250-400 sq ft.

houses

Potential to provide housing for 15–21 Million urban households

Cost Structure : Project IRR of 30 – 40%

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%

Confidential


Efficient Use of Space – Sample Unit Layout

Confidential


Interest in Housing: Focus Groups Household Income – Rs. 6,700- 7,700/month ($ 140)

Housing Concept3 Tested with Respondents

Area: Housing is within 1 hour of 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 lifts and single set of staircases– Complex would have a compound wall with shared

open 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

All respondents were very interested in this concept

Key is strong interest, proximity to facilities (e.g. schools, market places), connectivity via public 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 ft 3Housing concept tested is based on examples of larger (400-500 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. 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 Affordable Down Payment Rs. 70,000

Housing Loan Tenure1 20 years

Current Rent (Large City)

Rs. 1,500 – 1,800per month2

Current Average Savings

Rs. 700 – 1,000 per month

Confidential


Low Income Segments as Target MarketUntested Risk Profiles, different from Sub-prime in USA

75-80% LTV – significant individual contribution required; EMIs tend to be 35% of Monthly Income

Target customers have regular employment, albeit with low income – with an 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 of asset and replacement cost; and hence lower risk of asset bubbles

Low-Income Housing in India

Outcome: Untested, relatively low-risk segment with significant business potential

Very high LTV; creative structures developed to reduce EMIs

Loans extended without due consideration to ability to pay (basis employment history) – financing provided to those with questionable employment record

Cost 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 default

Sub-prime Experience in USA

Outcome: Sub-prime Defaults and Foreclosures

Confidential


Construction Laborer in India

Low Income Housing as a Driver for Economic Growth Significant Employment Potential to Lower-Income Segments

1,300

Capital2

550

Raw Material3

400

Gross Margin

Labor

3,000

750

Total

250

LaborCapital

250

400

Gross Margin

Raw Material

1,200

300

Total

Low Income Housing ProjectTraditional Housing Project

Note: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

Largest spend on labor

Within 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 poor

With 31 million workers (2005), the Construction Industry is the leading provider of employment to lower income segments in Urban India

A 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 industry

Comparison of spend on Labor in Construction Projects (as % of total Project Value)

13%25%

Confidential


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 customers

Large Private Developers Medium and Small Private Developers Very limited interest in building housing for low income

customers– Developers believe that there is still a large

opportunity in housing for middle income and higher income segments

– Recognize land as an extremely valuable resource and consider stand alone low income housing projects as sub optimal utilization of available land Not willing to compromise on profit margins Believe that it is difficult to make housing at

price affordable for low income segment

Interested 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 projects – Willing to cross subsidize low income houses

Believe that there is high competition in the middle segments and market is saturating

Some medium and small developers recognize the opportunity 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 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 segment

Some developers have also expressed interest in being part of a pilot project

Confidential


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 month

> 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

Targ

et S

egm

ents

for t

he P

roje

ct

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


Payroll deduction Facilitates aggregation

and information on customers

Retention tool High productivity

New Housing Business Model: Salaried SectorThe new product for those employed in formal sector settings required several reconfigurations of existing products and practices, with a direct link to customer employers

Developer(Small and Medium)

Financial InstitutionEmployer


Financial InstitutionEmployer

Formal Sector

Customers

Opportunity to Set Standards:Architectural Design, Maintenance, Consumer Education

Construction Finance

No construction finance(concern on buyers / delays)

Formal Sector

Customers

Developer puts 500 sq.ft.+ apartments on market in phases (3–4 years) and gets individual, walk in customers

Serve 1 customer ata time, won’t finance

below Rs. 12,000/month

Affordable 200-350 sq ft units, good quality, no delays

Upfront, financed, aggregated customers

Loans at affordable rates

Aggregated low risk, low cost to serve customers

Current Bottom of the Market (12k–20k) Alternative Model — Serves 6k–12k Market

Uncertainty of Sales Sales and Mktg. costs Funding constraint

Risk of Delays

Retention issues

Confidential


Financial return with aligned incentives

Aggregated customers

Potentially low risk

Low cost to serve

Aggregated customers

Use of tools suchas rolling guarantee to reduce risk

Credit check, collection, consumer education

Uncertainty of Sales Sales and Mktg. costs Funding constraint

Risk of Delays


New Housing Business Model: Informal SectorThe 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 financing

Financial Institution

Current Bottom of the Market (12k–20k) Alternative Model — Serves 6k–12k Market


Customers

MFI

Financial Institution

CreditGuarantee

Construction Finance

Affordable 200-350 sq ft units, good quality, no delays

Upfront, financed, aggregated customers

Often will not finance

Informal Sector

Customers

No construction finance(concern on buyers / delays)

Developer puts 500 sq.ft.+ apartments on market in phases (3–4 years) and gets individual, walk in customers

Confidential


Summary of Various Affordability LeversVarious quantifiable affordability levers significantly differ from each other in terms of impact on affordability and feasibility

Note: 1 Sales Tax and Excise Duty Exemption ;The numbers in the graph represent the percent reduction of gap in affordability due to the lever Source: Discussions with Industry Participants, Monitor Analysis

Land Subsidy

Subsidized Construction material

Bulk Material Purchase

Longer Tenure Loan

Stamp Duty and Registration

waiver on Land

FSI Increase

Tax Concessions1

Interest Subsidy

Semi Finished Construction

Low Cost Construction

Small Sized Houses

MediumHigh LowFeasibility

Stamp Duty Exemption

to CustomerIncome tax Exemption to Developer

Registration Fee s Waiver to Customer

Sales and MarketingProject implementation

Support provided across the affordable housing value chain

Development of business plan including strategy

Organization design and structure

Roles and responsibilities

Identification of functions that can be outsourced/inhouse

Project/Business Economics

Sensitivities of plan to approval process, construction costs and time, sales efficiencies, etc

Business Blueprint

Business Planning and Organization

Design

Land selection

and validation

Design and Developmen

t

Product mix and pricing

Sales process design

Training of client team

Databank of unit layouts (Lower cost and increase value to customer)

Improve mix of commercial and residential to improve returns

Databank of site layouts to incorporate open, green spaces, max FSI, etc.)

Strategy to reach out to different sets of customers

Building the sales process from the time a customer walks in to the project until the time possession is handed over to the customer.

Templatize processes

Access to Monitor Networks

Financing

End-to-end handholding : Base IP and customized application; Decision support and overall knowledge

Access to housing

financing companies

Access to targeted financing for specific projects

Access to double-bottomline funds for investment at a business level

Access to PE funds interested in investing in affordable housing

Developing list of attractiveness criteria as well as inhibiting features to evaluate areas for determining ‘buy’ decision

Validation of selected land parcels

Facilitating site visits by potential customers to determine attractiveness and demand.

Project phasing

Developing optimal product mix given FSI norms and desired returns

Differential product pricing

Work with banks, MFIs and specialized institutions to enable access to financing options for customers at booking stage

Tie-ups with financial institutions for both formal and informal sector customers

Structure team in order to achieve long term competencies in selling

Train team to be able to do this at scale across projects

Monitor’s Value Proposition to Developers

Day 1 Session 4: International & Country … Alliance Project Output Day 1 Session 4: International...

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