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Copyright © 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.

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

(2)

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



Private Equity Funds

Governments



City Strategies



Cluster

Development



Country

Competitiveness

Non Profits



Social Venture Funds



Impact Investing



Education

(3)

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

(4)

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 100

Current segment served

Potential segment that can be served

The Initial Situation

500+ sq. ft

houses

(5)
(6)

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

(7)

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

(8)

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 and

unit 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

(9)
(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

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

(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 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.”

(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.”

(13)

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

(14)

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 80,000

Net 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.

(15)

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

(16)

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

(17)

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

(18)

Low Income Housing

A Unique Opportunity for Social Change and Attractive Returns

Attractive

Returns

Allows

Government

funds to be

spent on the

poor

Provides an

alternative

to Slums

Enhances

quality of

life

Transforms

Financial

Situation

Creates

Employment

Increases

GDP

1

2

5

4

Employment and

Multiplier effect;

Taxes,

Better planned and offer

a significant upgrade in

quality of living

Construction is largest

employer in the country,

Low Income Housing is

most labor intensive

3

Access to better

sanitation, water,

healthcare, community

and green spaces, safer

environments, schools,

etc.

EMI payments

necessitate savings and

greater financial

discipline

Investing in a house

leads to saving on rent,

wealth creation of an

asset & a security net

(19)

Facilitating Low Income Housing in Urban India

Developing a Broader Ecosystem

Increasing Supply

of Housing

Increased Access

to Housing

Finance

Supporting

Government

Creating Customer

Education

Modules

Addressing

Unintended

Consequences

Creating a robust

supply and finance

industry

Today, the needs are different — and we have chosen to focus on elements to strengthen a

much broader ecosystem as our priority

References

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