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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)
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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
Copyright © 2008 Monitor Company Group, L.P. — Confidential — MUM4
Low Income, not Low Cost or Low Quality
Confidential
Copyright © 2008 Monitor Company Group, L.P. — Confidential — MUM5
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%
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Copyright © 2008 Monitor Company Group, L.P. — Confidential — MUM6
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
Copyright © 2008 Monitor Company Group, L.P. — Confidential — MUM7
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)
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Copyright © 2008 Monitor Company Group, L.P. — Confidential — MUM8
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
Copyright © 2008 Monitor Company Group, L.P. — Confidential — MUM9
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
Copyright © 2008 Monitor Company Group, L.P. — Confidential — MUM10
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
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Copyright © 2008 Monitor Company Group, L.P. — Confidential — MUM11
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
Copyright © 2008 Monitor Company Group, L.P. — Confidential — MUM14
Back-up
Confidential
Copyright © 2008 Monitor Company Group, L.P. — Confidential — MUM15
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.
Facilitating Broader Market
Innovations
Confidential
Copyright © 2008 Monitor Company Group, L.P. — Confidential — MUM16
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
Copyright © 2008 Monitor Company Group, L.P. — Confidential — MUM17
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
Copyright © 2008 Monitor Company Group, L.P. — Confidential — MUM18
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
Copyright © 2008 Monitor Company Group, L.P. — Confidential — MUM19
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
Copyright © 2008 Monitor Company Group, L.P. — Confidential — MUM20
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
Facilitating Broader Market
Making Innovations
Confidential
Copyright © 2008 Monitor Company Group, L.P. — Confidential — MUM21
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
Copyright © 2008 Monitor Company Group, L.P. — Confidential — MUM22
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
Copyright © 2008 Monitor Company Group, L.P. — Confidential — MUM23
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.
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Copyright © 2008 Monitor Company Group, L.P. — Confidential — MUM24
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
Copyright © 2008 Monitor Company Group, L.P. — Confidential — MUM25
Efficient Use of Space – Sample Unit Layout
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Copyright © 2008 Monitor Company Group, L.P. — Confidential — MUM26
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
Copyright © 2008 Monitor Company Group, L.P. — Confidential — MUM27
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
Copyright © 2008 Monitor Company Group, L.P. — Confidential — MUM28
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%
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Copyright © 2008 Monitor Company Group, L.P. — Confidential — MUM29
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
Copyright © 2008 Monitor Company Group, L.P. — Confidential — MUM30
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
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Copyright © 2008 Monitor Company Group, L.P. — Confidential — MUM31
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
Developer(Small and Medium)
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
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Copyright © 2008 Monitor Company Group, L.P. — Confidential — MUM32
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
Developer(Small and Medium)
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
Developer(Small and Medium)
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
Copyright © 2008 Monitor Company Group, L.P. — Confidential — MUM33
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