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SAN FRANCISCO SÃO PAULO SEOUL SHANGHAI SINGAPORE TOKYO TORONTO ZURICH BEIJING CAMBRIDGE CHICAGO DELHI DUBAI HONG KONG JOHANNESBURG
PARIS
LOS ANGELES MADRID MOSCOW MUMBAI MUNICH NEW YORK RIYADH LONDON
CASABLANCA
Making the Market for Private Sector Urban
Low Income Housing in India
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 Foundation
Monitor Group: An Introduction
Michael Porter,
Harvard Business School
Director 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
Growth Strategies
Leadership &
Innovation
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City Strategies
Cluster
Development
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Impact Investing
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Monitor Inclusive Markets in India
A unique mission and mode of operation
Customers Developers Financial Institutions Construction Technology
Identifying and refining
business models at scale
Making the market for low income
housing in India
Facilitating Low Income Housing in Urban India
The Initial Situation
In 2006–07, we conducted an in-depth FIRST / World Bank study for NHB
Vibrant housing market in India, with housing
finance growing at over 36% YoY
The cheapest apartment was ~500 square feet
selling at Rs 500–600,000
– Only the top 12–15% of the urban housing
market could afford this housing (if they got
financing)
Customers in the next 35% income often live in
rent rooms in slums and low income
neighborhoods
– Live in poorly constructed small houses with
bad sanitary conditions and lack of facilities
Wanted and could afford small houses in
suburban areas at current market prices
– But no supply of housing, no access to
mortgages (especially for the informal sector)
250-400 sq.
ft houses
The study identified a commercially viable opportunity to
serve the next 35% of the urban income pyramid &
developed a series of innovative, market-based solutions to
address the problem
– E.g. business model with variants such as
“employer aggregator”; “land as inventory”
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 100Current segment served
Potential segment that can be served
The Initial Situation
500+ sq. ft
houses
Customer Perspective: Social Need and Willingness to Pay
(16 Focus Groups and over 2,000 potential customers)
Appalling conditions
of Slum-Dwellers
Profile — Nathubhai
Profile — Ganesh
Many lower income households live in poor conditions and are dissatisfied with their housing
situation; but their searches for affordable housing have been unsuccessful
Source: Primary Research (n=2000), Monitor Analysis
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 dream
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.
Steady job as a factory
worker in a textile
enterprise in Ahmedabad
Monthly HH income
~Rs 8,000, savings up to
Rs 900–1,000 p.m.
Self-employed Mechanic in Mumbai
Monthly HH
income ~ Rs 11,000,
savings up to
Rs 1000 p.m.
Lives in 150 sq. ft.
room in slums, Rent Rs 2,400
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
Lives in 1 RmK in low income
neighborhood, Rent Rs 1800
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
Land as Inventory
Short life cycle
High IRR ~40%
Good Margins ~17.8%
Land as Asset
Longer life cycle
Super profits
Construction is incidental
Innovative Business Model for Low Income Housing
Buy Land
Incremental Construction
Sell Units
Wait for Land Value
Appreciation
The developers entering the low income housing market have different approaches than
those used in the traditional real estate sector
Traditional Developer
gg
Buy Land
Sell All Units
Construct Completely
Low Income Housing Developer
Making a Market: 2008-2009 - Creating supply through raising
awareness and “end-to- end” facilitation of the local ecosystem
Dissemination at leading conferences
Press articles in business press and industry journals
Convened group sessions for targeted stakeholders
1 on 1 sessions with developers, financiers, broad range of stakeholders
Monitor raised awareness
of the opportunity and
the solution
1
Business Blueprint
Land Selection &
Project Design
Project
Implementation
Sales and
Marketing
Access to
Financed
Customers
Monitor offered “end-to-end handholding” services to developers plus base IP and customized application:
Business strategy and OD Business economics and
project financing
2
Land selection and
validation
Site visits and project design
Project phasing and
implementation support
End-to-end sales process,
customer outreach and marketing design
Embed competencies in
client team for long-term
Enable access to financing
options for customers
Broker tie-ups with FIs for
informal and formal customers
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
Monitor worked
on broader gaps
in the supply
ecosystem
3
Worked with architects to develop site andunit layouts and designs Studied construction technologies to shorten build-time, and enhance developer IRR Templatized sales process to reach desired customer segments Aggregated customers and arranged for customer financing
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
Mumbai, Maharashtra Swarajya, Neptune Group
Samruddhi Complex, Poddar Housing TMC, Matheran Realty
Pink City and Star City, Rashmi Housing Shubh Griha, Tata Housing
Karjat Land Developers
Sathya Nagar, Conglome Techno Constructions Vaishnavi SAI Complex, Shubh Aangan Realty Valram Vatika and Valram Ashish, Valram
Constructions
Sankul Panvelkar SAS Group Ahmedabad, Gujarat
Om Shanti Nagar 2, Santosh Associates Navjivan Housing, Foliage
Gokul Galaxy, Galaxy Developer
New Maninagar Apartments, Dharmadev Builders Umang Lambha, DBS Affordable Home Strategy Ltd. Karnavati Apartment, Shree Ram Developers
Bhiwadi, Rajasthan
Avalon Homes, Avalon Group Dev City, Arun Dev Developers
Bangalore, Karnataka Vaibhava, VBHC Shubha, Janaadhar Chennai, Tamil Nadu
Conglomerate Atulya, Annai Builders
Meerut, UP Spice Homes
Pune, Maharashtra
Anandgram, Vastushodh Project Private Ltd. Shalini Lakeview, Trishul Builders
Nagpur, Maharashtra
Shridhar Empire AC, Shridhar Buildcon Bawal, Haryana
Ashray Homes, Surefin Builders
Surat, Gujarat
Laxmi Villa Township Sai Vihar Residency
Cochin, Kerala
Star Apartments, Star Homes
Rohini, Delhi
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 ft
2(Rs. 5.20 L), 2 BHK (577 units): 523 ft
2(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.”
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.”
Low Income Housing Finance
Different Model From Mid and High Income Customers
Income
documents / tax papers generally inadequate Credit
appraisal
Salaried documents / tax formsBased on income Determine eligibility based on income proof General creditappraisal Sanctionloan
Self employed / Informal sector
Use surrogates for income (not credit)
appraisal
Scope of Business Margins, Credit/Debit Terms, Stability
Savings Habit (e.g., from chit funds) Track Record
Reference Checks, Supplier/Customer Referrals
Gross Receipts Personal Discussion Background and Profile Prior History and Relationship
Based on the parameters sanction/ reject loans IN F O R M A L S E C T O R F O R M A L S E C T O R
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.
With supply of low income housing units increasing, the need was for low income housing
finance companies to provide mortgages to customers
Customer and branch-level economics
Highly competitive unit economics
25,844 13,844 4,000 1,000 2,000 2,000 3,000 0 10,000 20,000 30,000
Hub & spoke staff/overheads Hub & Spoke staff
and overheads Verification Verification (project,customer) Total Transaction Costs NPA provision Documentation 67,775 63,775 4,000 0 20,000 40,000 60,000 80,000 Total Income Processing fees (1%)
Net Interest Income
41,931
25,844 67,775 0 20,000 40,000 60,000 80,000Net Interest Income + Process Fee
Profits per transaction Cost to Serve
per transaction
Per Transaction Profits
Per Transaction cost structure
Note: All figures (unless otherwise stated) are on a discounted basis; rate of discount at 10%; customer interest rate at 14% Loan Origination Cost = Rs. 8,000
Additional costs of dealing with the informal customer segment – such as verification – can
be factored into the processing fees and interest rates
Rs.
Low Income HFC
Profitability expectation over 10 years
277 180 102 53 27 16 6 1 -1 -3 -50 0 50 100 150 200 250 300 Y10 Y9 Y8 Y7 Y6 Y5 Y4 Y3 Y2 Y1 N et P ro fit / L os s (in R s. C ro re s) 3.3 3.2 2.9 2.6 2.5 2.9 0.8 -13.9 -15 -10 -5 0 5 10 15 20 25 -3.0 2.2 Y1 Y3 -13 1 Y2 -4 Y10 23 Y9 22 Y8 19 Y7 17 Y6 13 Y5 10 Y4 6
Profit After Tax
Return on Asset and Return on Equity
P er ce nt ag e R et ur n Return on Equity Return on Assets
Assumptions
Average loan Ticket Size is Rs. 4 Lakhs Loan To Value: No more than 80%
Average Loan Tenure: 8 years – scheduled
loan tenure is 15 years
Gross spread on loans: 4% Cost of debt: 10%
Debt Equity ratio: Year 5 at 4: 1, Year 10 at 6: 1 NPA is assumed to be 1% of portfolio starting
from Year 4
Y-o-Y portfolio growth assumed to be between
50 – 200% for a start-up, decreasing yearly
Portfolio Size
– Year 1 Rs. 20 Cr. – Year 3 Rs. 150 Cr. – Year 5 Rs. 750 Cr.
Observations
ROE of 23% in year 10 is very robust by the
Indian financial industry standards (ROE for HDFC is 20%, ROE for DHFL is 21.7%)
ROA of 3% in year 10 is comparable to HFC
industry standards (ROA for HDFC is 2.7% and ROA for DHFL is 1.9%)
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
Source: Monitor Research, Monitor Analysis
Low Income Housing Finance Companies
Entry of larger players catering to this segment
National Housing Bank has been proactively supporting housing finance
companies that are catering to low income housing customers
Along with new housing finance companies, an increasing number of established financial
services institutions and banks are entering/exploring the low income housing finance
market
1Monthly Household Income; 2Affordability 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 Rs 1,200 per Lac (at 12% interest for a 15 year loan); 3Conservative estimates that 60% of total households in MHI of
Rs 5–20K (36Mn) are renting and looking to buy a house of their own. Source: NHB Trends in Housing; CRIS Infac Report; Monitor Research
Price of unit2> Rs 25 Lakh
Potential demand from ~2 M HHs with
estimated Market Size of ~Rs 500,000 Cr
Various mortgage finance options
available for segment
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
Price of unit: Rs 10–25 Lakh
Potential demand from ~5 M HHs with
estimated Market Size of ~Rs 900,000 Cr
Mortgage finance available broadly
1% (0.7MM) 5% (3.4MM) 22% (15.0MM) 33% (22.4MM) 4% (2.7MM) 10,000–20,000 >80,000 30,000–40,000 <5,000 40,000–80,000 31% (21.1MM) 5% (3.4MM) 5,000–10,000 20,000–30,000
MHI
1 (Rs)Price of House: Rs 3–10 Lakh
Potential demand from ~ 22 Mn3 HHs
with estimated Market Size ~Rs 1,100,000 Cr
Supply of Housing Finance
Various mortgage finance options
available for segment
Potential size of mortgage market ~ Rs
400,000 Cr
Mortgage finance available broadly Potential size of mortgage market
~Rs 675,000 Cr
Severely constrained supply of
housing finance for informal sector
Finance available for MHI > Rs 12K in
the formal sector, limited availability below MHI of Rs 12K for formal sector and 20K for informal sector
Potential size of mortgage market