Making the Market for Private Sector Urban Low Income Housing in India (July 2011)


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Making the Market for Private Sector Urban Low Income Housing in India (July 2011)

  1. 1. BEIJING CAMBRIDGE CASABLANCA CHICAGO DELHI DUBAI HONG KONG JOHANNESBURGLONDON LOS ANGELES MADRID MOSCOW MUMBAI MUNICH NEW YORK PARIS RIYADHSAN FRANCISCO SÃO PAULO SEOUL SHANGHAI SINGAPORE TOKYO TORONTO ZURICH Making the Market for Private Sector Urban Low Income Housing in India July 2011 Based on Projects for National Housing Bank, with active support from World Bank and funded by FIRST Initiative Implementation support by IFC, Michael & Susan Dell Foundation, and FEM Italia Monitoring and Evaluation project funded by Rockefeller FoundationCopyright © 2011 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.
  2. 2. Monitor Group: An IntroductionFounded by renowned academics, the Monitor Group has grown rapidly to become aleading global management consulting and merchant banking firm Michael Porter, Founded by Michael Porter and other HBS faculty in 1983 Harvard Business School Director and Co-Founder Renowned for focus on strategy and cutting-edge ideas of the Monitor Group that help clients grow We believe that “Ideas can create impact.” With over 25 offices across the globe, we go the last mile… Corporates Governments Non Profits Growth Strategies City Strategies Social Venture Funds Leadership & Cluster Impact Investing Innovation Development Education Private Equity Funds Country Ecosystem Competitiveness Copyright © 2011 Monitor Company Group, L.P. 2
  3. 3. Monitor Inclusive Markets in IndiaA unique mission and mode of operationAn autonomous unit that is actively facilitating scaling of market based solutions Customers Developers Financial Institutions Construction Technology Identifying and refining Making the market for low income business models at scale housing in India Copyright © 2011 Monitor Company Group, L.P. 3
  4. 4. Facilitating Low Income Housing in Urban IndiaThe Initial SituationIn 2006–07, we conducted an in-depth FIRST / World Bank study for NHB The Initial Situation Urban India — Expenditure & Income PyramidVibrant housing market in India, with housingfinance growing at over 36% YoYThe cheapest apartment was ~500 square feet 500+ sq. ft houses MHE: 16% Monthlyselling at Rs 500–600,000 >Rs 9,625 pm (10MM) Income – Only the top 12–15% of the urban housing market could afford this housing (if they got Rs. 11,000 financing) USD 220Customers in the next 35% income often live in 250-400 sq. MHE: ft houses 37%rent rooms in slums and low income Rs 4,575– Rs 9,625 pm (~23MM)neighborhoods – Live in poorly constructed small houses with bad sanitary conditions and lack of facilities Rs. 5,000 MHE: USD 100Wanted and could afford small houses in 33% Rs 2,500–suburban areas at current market prices Rs 4,575 pm (~21MM) – But no supply of housing, no access to mortgages (especially for the informal sector) Rs. 2,500 USD 50 The study identified a commercially viable opportunity to MHE: 14% serve the next 35% of the urban income pyramid & <Rs 2,500 pm (~9MM) developed a series of innovative, market-based solutions to address the problem Current segment served – E.g. business model with variants such as “employer aggregator”; “land as inventory” Potential segment that can be served Copyright © 2011 Monitor Company Group, L.P. 4
  5. 5. Low Income, not Low Quality Copyright © 2011 Monitor Company Group, L.P. 5
  6. 6. 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 Profile — Nathubhai Appalling conditions Profile — Ganesh Steady job as a factory of Slum-Dwellers Self-employed Mechanic in Mumbai worker in a textile Live in poorly Monthly HH enterprise in Ahmedabad constructed small income ~ Rs 11,000, Monthly HH income cramped houses savings up to ~Rs 8,000, savings up to Poor sanitary Rs 1000 p.m. Rs 900–1,000 p.m. conditions - shared Lives in 150 sq. ft. toilets, bad room in slums, Rent Rs 2,400 Lives in 1 RmK in low income drainage, water neighborhood, Rent Rs 1800 Married with 2 children logging during Family size: 5 (mother, wife, 2 children) monsoons Assets – Bank Account, LIC (Rs 1.5L), Assets – Bank Account, LIC (Rs 3L), TV Refrigerator and PC Lack of facilities — Education: Both children attend private properly planned Education: Both children attend Gujarati medium schools access points, English-medium school Rent: Increased by 50% in past walkways, gardens, Rent: Has seen significant & frequent 3 years, has moved every dedicated schools increases in rent, has moved house 5 2 to 3 years etc. times in 12 years Both share a dream . . . “A house of their own” Can afford a 250–350 sqft. house, willing to make 20% down payment and pay 35% of monthly income as EMIs to realize their dreamSource: Primary Research (n=2000), Monitor Analysis Copyright © 2011 Monitor Company Group, L.P. 6
  7. 7. Innovative Business Model for Low Income Housing The developers entering the low income housing market have different approaches than those used in the traditional real estate sector Traditional Developer Low Income Housing Developer Buy Land Buy Land Incremental Construction gg Sell All Units Sell Units Wait for Land Value Construct Completely Appreciation Land as Asset Land as Inventory Longer life cycle Short life cycle Super profits High IRR ~40% Construction is incidental Good Margins ~17.8%Source: Monitor Research, Monitor Analysis Copyright © 2011 Monitor Company Group, L.P. 7
  8. 8. Making a Market: 2008-2009 - Creating supply through raising awareness and “end-to- end” facilitation of the local ecosystem1 Dissemination at leading conferences Monitor raised awareness Press articles in business press and industry journals of the opportunity and the solution Convened group sessions for targeted stakeholders 1 on 1 sessions with developers, financiers, broad range of stakeholders2 Monitor offered “end-to-end handholding” services to developers plus base IP and customized application: Access to Land Selection & Project Sales and Business Blueprint Financed Project Design Implementation Marketing Customers Business strategy and OD Land selection and Project phasing and End-to-end sales process, Enable access to financing Business economics and validation implementation support customer outreach and options for customers project financing Site visits and project design marketing design Broker tie-ups with FIs for Embed competencies in informal and formal client team for long-term customers3 Monitor worked Studied Worked with on broader gaps construction Templatized sales Aggregated architects to technologies to process to reach customers and in the supply develop site and shorten build-time, desired customer arranged for ecosystem unit layouts and and enhance segments customer financing designs developer IRR Two years, 600 developers, support from multiple stakeholders and a downturn in the economy to: (i) Achieve a clear recognition in the market of the opportunity (ii) Lead to a number of players in this space Copyright © 2011 Monitor Company Group, L.P. 8
  9. 9. Efficient Use of Space – Sample Unit Layout Copyright © 2011 Monitor Company Group, L.P. 9
  10. 10. Market Map (September 2010) An estimated 50,000 low income housing units were sold by 40+ developers across multiple cities in India in 2010-2011 Bawal, Haryana Bhiwadi, Rajasthan Ashray Homes, Surefin Builders Avalon Homes, Avalon Group Dev City, Arun Dev Developers Rohini, DelhiAhmedabad, Gujarat Renaissance Nakshatra, Renaissance Township Om Shanti Nagar 2, Santosh Associates Navjivan Housing, Foliage Meerut, UP Gokul Galaxy, Galaxy Developer Spice Homes New Maninagar Apartments, Dharmadev Builders Umang Lambha, DBS Affordable Home Strategy Ltd. Karnavati Apartment, Shree Ram DevelopersSurat, Gujarat Laxmi Villa Township Sai Vihar ResidencyMumbai, Maharashtra Nagpur, Maharashtra Swarajya, Neptune Group Shridhar Empire AC, Shridhar Buildcon Samruddhi Complex, Poddar Housing TMC, Matheran Realty Pink City and Star City, Rashmi Housing Bangalore, Karnataka Shubh Griha, Tata Housing Vaibhava, VBHC Karjat Land Developers Shubha, Janaadhar Sathya Nagar, Conglome Techno Constructions Vaishnavi SAI Complex, Shubh Aangan Realty Valram Vatika and Valram Ashish, Valram Chennai, Tamil Nadu Constructions Conglomerate Sankul Panvelkar Atulya, Annai Builders SAS Group Pune, Maharashtra Anandgram, Vastushodh Project Private Ltd. Cochin, Kerala Shalini Lakeview, Trishul Builders Star Apartments, Star Homes Copyright © 2011 Monitor Company Group, L.P. 10
  11. 11. Swarajya - Neptune Group, Mumbai Location: Ambivali, Mumbai 72 mins from city center by train Transport: Railway Station is 1.25 kms; transport provided by Neptune, or a 20 minute walk Infrastructure: Close to markets, temples, schools and hospitals Number of Units: 19,112 total — 2,446 under construction; 3,000 sold; 90% residential units, 10% commercial Unit Format & Prices:1 BHK (1869 units): 315 ft2 (Rs. 5.20 L), 2 BHK (577 units): 523 ft2 (Rs. 8.90 L) “We already have plans of building other low-income housing projects in Pune, Nagpur and other cities after seeing the success of our first LIH project in Ambivali.” - Nayan Shah, Promoter of Neptune Group Copyright © 2011 Monitor Company Group, L.P. 11
  12. 12. Navjivan Housing — Foliage, Ahmedabad Location: Vatva, Ahmedabad 13 kms from Ahmedabad city center Transport: Well connected public transport Infrastructure: Schools and colleges nearby Number of Units: Residential: 423 units; Commercial: 38 shops Unit Format & Prices: 1 RK (240 units): 299-414 ft2 (Rs.2.8-4.8 L) 1 BHK (148 units): 458-546 ft2 (Rs.3.7-6.6 L) 2 BHK (35 units): 632-837 ft2 (Rs.5.8 – 9.6 L) “Foliage has already acquired land for its 2nd low income housing project in Ahmedabad. The interest in low income housing we’ve seen from customers has been phenomenal.” - Nehal Shah, CEO, Foliage Copyright © 2011 Monitor Company Group, L.P. 12
  13. 13. Low Income Housing Finance Different Model From Mid and High Income Customers With supply of low income housing units increasing, the need was for low income housing finance companies to provide mortgages to customers FORMAL SECTOR Credit appraisal Based on income Determine eligibility based General credit Sanction Salaried documents / tax forms on income proof appraisal loan Scope of BusinessINFORMAL SECTOR Margins, Credit/Debit Terms, Stability Use Based on the Income Savings Habit (e.g., from chit funds) Self employed / surrogates for Track Record parameters documents / tax papers Informal sector income (not credit) Reference Checks, sanction/ reject generally inadequate appraisal Supplier/Customer Referrals loans Gross Receipts Personal Discussion Background and Profile Prior History and Relationship With a business model that accurately captures the needs of, and addresses limitations faced by, the low income household, housing finance companies can break even in year 3, provide a Return on Assets of 2.5-3% in year 5, and Return on Equity of 17% in year 5. Copyright © 2011 Monitor Company Group, L.P. 13
  14. 14. Customer and branch-level economics Highly competitive unit economics Additional costs of dealing with the informal customer segment – such as verification – can be factored into the processing fees and interest rates Rs. Per Transaction cost structure 30,000 13,844 25,844 20,000 4,000 Loan Origination Cost = Rs. 8,000 10,000 1,000 2,000 2,000 3,000 0 Verification Verification Hub & Spoke staff Hub & spoke Documentation NPA provision Total Transaction (project,customer) and overheads staff/overheads Costs Rs.Per Transaction Profits 80,000 80,000 63,775 67,775 67,775 25,844 60,000 60,000 41,931 40,000 40,000 20,000 20,000 4,000 0 0 Processing Net Interest Income Total Income Net Interest Income Cost to Serve Profits per fees (1%) + Process Fee per transaction transactionNote: All figures (unless otherwise stated) are on a discounted basis; rate of discount at 10%; customer interest rate at 14% Copyright © 2011 Monitor Company Group, L.P. 14
  15. 15. Low Income HFC Profitability expectation over 10 years The low income housing finance business is a commercially attractive opportunity – can break even in year 3 and generate an ROE of in excess of 20% by year 10 Indicative financials for a hypothetical start up housing finance company Assumptions Profit After Tax 277 Average loan Ticket Size is Rs. 4 Lakhs 300 Loan To Value: No more than 80% 250 180 Average Loan Tenure: 8 years – scheduled 200 loan tenure is 15 years 150 102 Gross spread on loans: 4% Net Profit/ Loss (in Rs. Crores) 100 53 Cost of debt: 10% 50 16 27 Debt Equity ratio: Year 5 at 4: 1, Year 10 at 6: 1 -3 -1 1 6 0 NPA is assumed to be 1% of portfolio starting from Year 4 -50 Y-o-Y portfolio growth assumed to be between Y1 Y2 Y3 Y4 Y5 Y6 Y7 Y8 Y9 Y10 50 – 200% for a start-up, decreasing yearly Portfolio Size – Year 1 Rs. 20 Cr. Return on Asset and Return on Equity – Year 3 Rs. 150 Cr. 25 22 23 – Year 5 Rs. 750 Cr. Return on Assets 19 20 17 Return on Equity 15 13 10 Percentage Return 10 6 Observations 2.9 2.5 2.6 2.9 3.2 3.3 5 2.2 1 ROE of 23% in year 10 is very robust by the 0 -3.0 Indian financial industry standards (ROE for 0.8 HDFC is 20%, ROE for DHFL is 21.7%) -5 -13 -4 ROA of 3% in year 10 is comparable to HFC -10 industry standards (ROA for HDFC is 2.7% and -15 -13.9 ROA for DHFL is 1.9%) Y1 Y2 Y3 Y4 Y5 Y6 Y7 Y8 Y9 Y10Source: Monitor Research, Monitor Analysis Copyright © 2011 Monitor Company Group, L.P. 15
  16. 16. Low Income Housing Finance CompaniesEntry of larger players catering to this segmentAlong with new housing finance companies, an increasing number of established financialservices institutions and banks are entering/exploring the low income housing financemarket Pre-2008 2009–2010 2010–2011 National Housing Bank has been proactively supporting housing finance companies that are catering to low income housing customers Copyright © 2011 Monitor Company Group, L.P. 16
  17. 17. Low Income Housing in Urban India Vs the traditional market & the recent “Affordable” housing market The low-income housing segment (MHI of Rs 7,500 – 25,000) is estimated at 22 Million households with an estimated opportunity size of Rs. 1,100,000 Cr (USD 245 Billion) and is largely underserved Urban Income Pyramid Offering & Supply of Housing Supply of Housing Finance MHI1 Price of unit2 > Rs 25 Lakh Various mortgage finance options (Rs) 1% Potential demand from ~2 M HHs with available for segment >80,000 (0.7MM) estimated Market Size of ~Rs 500,000 Cr Potential size of mortgage market ~ Rs Various mortgage finance options 400,000 Cr 5% available for segment 40,000–80,000 (3.4MM) Price of unit: Rs 10–25 Lakh Mortgage finance available broadly 4% 30,000–40,000 (2.7MM) Potential demand from ~5 M HHs with Potential size of mortgage market estimated Market Size of ~Rs 900,000 Cr ~Rs 675,000 Cr Mortgage finance available broadly 5% 20,000–30,000 (3.4MM) Price of House: Rs 3–10 Lakh Severely constrained supply of Potential demand from ~ 22 Mn3 HHs housing finance for informal sector 22% 10,000–20,000 with estimated Market Size Finance available for MHI > Rs 12K in (15.0MM) ~Rs 1,100,000 Cr the formal sector, limited availability below MHI of Rs 12K for formal sector 31% and 20K for informal sector 5,000–10,000 (21.1MM) Potential size of mortgage market ~ Rs 8,80,000 Cr 33% <5,000 (22.4MM)1Monthly Household Income; 2 Affordability defined as households which have EMI / MHI Ratio of 40% of a Home loan which has a 20% down paymenton an Home value, EMI level of Rs 1,200 per Lac (at 12% interest for a 15 year loan); 3 Conservative estimates that 60% of total households in MHI ofRs 5–20K (36Mn) are renting and looking to buy a house of their own.Source: NHB Trends in Housing; CRIS Infac Report; Monitor Research Copyright © 2011 Monitor Company Group, L.P. 17
  18. 18. Low Income Housing A Unique Opportunity for Social Change and Attractive Returns Allows EMI payments Government necessitate savings and greater financial Employment and funds to be discipline Multiplier effect; 5 spent on the 1 Taxes, Investing in a house poor leads to saving on rent, Transforms Increases wealth creation of an Financial asset & a security net GDP Situation Attractive Access to better Construction is largest Returns sanitation, water,employer in the country, 4 2 healthcare, communityLow Income Housing is Enhances and green spaces, safer most labor intensive Creates environments, schools, quality of etc. Employment life Provides an alternative to Slums Better planned and offer 3 a significant upgrade in quality of living Copyright © 2011 Monitor Company Group, L.P. 18
  19. 19. Facilitating Low Income Housing in Urban IndiaDeveloping a Broader EcosystemToday, the needs are different — and we have chosen to focus on elements to strengthen amuch broader ecosystem as our priority Creating Customer Education Increased Access Modules Creating a robust to Housing supply and finance Finance industry Increasing Supply Supporting of Housing Government Addressing Unintended Consequences Copyright © 2011 Monitor Company Group, L.P. 19