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 ApprovalsLoan Approvals Rs. 914 billion Rs. 914 billion (upto Jun 2005)(upto Jun 2005) (US $ 21.02 bn) (US $ 21.02 bn)

• Loan DisbursementsLoan Disbursements Rs. 759 billion Rs. 759 billion(upto Jun 2005) (upto Jun 2005) (US $ 17.44 bn) (US $ 17.44 bn)

• Housing Units FinancedHousing Units Financed 2.6 million 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

22.0

15.6

11.1

8.36.6 5.9 5.3 5.1 4.7 4.3 4.5

0

5

10

15

20

25

30

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Pro

per

ty V

alu

e (R

s L

ac)

&

Aff

ord

abil

ity

0.00

0.50

1.00

1.50

2.00

2.50

3.00

3.50

4.00

An

nu

al I

nco

me

(Rs

Lac

)

Property Cost (Lac) Affordability Annual Income (Rs)

Effective Rates On Home Loans

2005 2002 2000

Loan amount 2,000,000 2,000,000 2,000,000

Nominal Interest Rate(%) 7.75% 10.75% 13.25%

Max deduction for interest allowed 150,000 150,000 75,000

Deduction on principal 100,000 20,000 20,000

Tenor (years) 15 15 15

Total amount paid per year 225,000 269,028 313,500

Interest component 155,000 215,000 265,000

Principal repaid 100,000 54,028 48,500

Tax amount saved 78,030 51,250 30,325

Effective interest paid on home loan 76,970 163,750 234,675

Effective interest on home loan 3.85% 8.19% 11.73%

Mortgages as a % of GDP

3%

9%

13%

23%

36%37%

49% 51%

0%

10%

20%

30%

40%

50%

60%

Ind

ia

Th

ail

an

d

Ko

rea

Ma

lay

sia

Sin

ga

po

re

Ta

iwa

n

Ho

ng

Ko

ng

US

A

54%

UK

48%

Ger

ma

ny

70%

70%

Den

ma

rk

Housing Shortage

Source : NBO,

14.6

19.819.4

21.8

13.5

23.4

0

50

100

150

200

250

1961 1971 1981 1991 2001E 2005E

0

5

10

15

20

25

Usable Housing Stock (LHS) No of Households (LHS) Shortfall (RHS)

Usa

ble

Hou

sin

g S

tock

&

No

of

Hou

seho

lds

(Mill

ion)

Sho

rtfa

ll (M

illio

n)

Increasing Urbanisation TrendsPopulation Projection: 2001-2025

0

10

20

30

40

50

60

70

80

Urb

an-R

ura

l Pop

ula

tion

(%

)

2001 2005 2010 2015 2020 2025

Year

UrbanRural

28

72

29

71

30

70

32

68

34

66

36

64

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

Thank You