2010 01 27 SAHF - Monitor Presentation

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South Asia Housing Finance Forum, January 27th, 2010

A Market Based Approach to Low Income

Hous ing : Commercial Viabi l i ty of Supp ly

Based on a Project for National Housing Bank, with activesupport from World Bank and funded by FIRST Initiative

Implementation support by IFC and Michael & Susan DellFoundation

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 otherwisewithout 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

SO PAULO

SEOUL

SHANGHAI

SINGAPORE

TOKYO

TORONTO

ZURICH

2 0 0 9


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Confidential

Copyright 2008 Monitor Company Group, L.P. Confidential2

Note: 1Monthly Household Income; 2Affordability defined as households which have EMI / MHI Ratio of 40% of a Home loan which has a 20% down payment onan 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 demandgrowth due to increasing prices and highinterest costs

Price of unit2> INR 25 Lakhs

Potential demand from ~2 M HHswithestimated Market Size:of ~INR 500,000 Cr

Various mortgage finance options availablefor 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 manylarge players (e.g. Omaxe, Ansals,Lodha, MAYTAS, Purvankara, etc.)

Offering & Market Potential

Price of unit:INR 1025 Lakhs

Potential demand from ~5 M HHswithestimated 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)

1000020000

>80000

3000040000

INR 12K in theformal sector, limited availability below MHIof INR 12K; negligible availability to theinformal 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 poorlyconstructed smallcramped houses

Poor sanitaryconditions -

shared toilets, baddrainage, waterlogging duringmonsoons

Lack of facilities -properly plannedaccess points,walkways,

gardens,dedicated schoolsetc.

Appalling conditionsof Slum-Dwellers

Customer Perspective: Social Need and Willingness to Pay

(16 Focus Groups and over 2,000 potential customers)

Many lower incom e households l ive in poor co ndi t ions and are dissat is f ied with their

hou sing si tuat ion; bu t their searches for af fordable housin g have been unsu ccessfu l

Steady job

as a factoryworker in a textileenterprise in Ahmedabad

Monthly HH income ~ Rs8,000, ($160) savings upto 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 toRs 1000 ($ 20) p.m.

Lives in 150 sq. ft.

room in slums, Rent Rs 2,400 ($ 48) Married with 2 children

AssetsBank Account, LIC (Rs 1.5L),Refrigerator and PC

Education: Both children attendEnglish-medium school

Rent: Has seen significant & frequentincreases in rent, has moved house 5

times in 12 years

Profile - Ganesh

Both share a dreamA house of their ownCan 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 incomeneighborhood, Rent Rs 1800 ($ 36)

Family size: 5 (mother, wife, 2 children)

AssetsBank Account, LIC (Rs 3L), TV

Education: Both children attend privateGujarati medium schools

Rent: Increased by 50% in past 3 years,

has moved every 2 to 3 years


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Low Income, not Low Cost or Low Quality


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Project details UOMKey

Numbers

Option With Land Cost / No Revenue ShareTotal Land size 10 sq. ft . 435,600

FSI allowed 1.80

Total area available for construction sq. ft . 784,080

Area 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 476,799

Mix of Houses - Area % of number

1 RMK 29% sq. ft . 220

1 BHKType 1 32% sq. ft . 300

1 BHKType 2 40% sq. ft . 400

Loading Factor for Saleable Value 25%

Mix of Houses - Base Price in Phase 1

1 RMK INR/sq. ft. 1100

1 BHKType 1 INR/sq. ft. 1200

1 BHKType 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 fromproject

Revenue from different SourcesCommercial (Rs) INR 9.45

Residential (Rs) INR 89.76Overall Realization of theProject (Rs. Crores) 99.21

Costs from different Sources

Cost of landINR

cr. 15.7

Construction CostINR

cr. 62.7

Sales and MarketingINR

cr. 3.0Overall 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 flatsPrice is constant over the duration of the projectThe value of area per square feet is enhanced using twomethods:Commercial space is valued more than residential spacewith an Average Yield Factor of 2

The mix of flats is such as to allow some area tobe sold at a higher price point

Cost of construction is Rs. 800 per square foot(comparable to other estimates for such projectsbased on our experience)

Land is owned by the developer

An Alternate Business ModelLand as Inventory

Sample Project Economics: Margin22%, IRR40%


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Conveying the opportunityArranging 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 ofstakeholders (over 400)

RAISING AWARENESS

Existing and new players for mortgage finance (includingincubating housing finance companies)

PE and VC funds (incubated a USD 100 Million housingecosystem fund)

Research on optimal architectural designs, low costconstruction 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 opportunity

2)Lead to a number of players in this space

SMALL

DEVELOPERS AND NEWPLAYERS

END TO END SUPPORT


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Market demonstration of Demand: Private sector projects

across India

Ahmedabad: Vatva

Taral Bakeri

Phase 1: 800 unitsConstruction start: June 2009Price: Rs 3.3 lakh5.6 lakh

Mumbai :Ambivili

Neptune 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: KarjatTMCMatheran Realty

15,000 units by June 2011;3,000 units in Phase 1June 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: Atibele

Janadhar11 acres: 1500 units1BHK and 2 BHK; Rs 4 lakhand 6 lakh Bangalore: Value Budget Housing

Rs 3-9 lakh townships on minimum10 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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Entry by potential scale players

Tata Housing

Launched a low income

housing township in Boisar,98 kms from South Mumbai

Spread over 67 acres andhas 1,000 flats in the firstphase

1 RMK 283 sq. ft and 1 RMKwith 360 sq. ft.

Flats priced between Rs. 3.9lakh and Rs. 6.7 lakh

Value Budget HousingDevelopment Corporation

Jerry Rao (founder,

MphasiS) and P.S.Jayakumar (ex Citibank) setup housing developmentcompany

Large business opportunitywith significant social impact

Goal: 1 Million homes inurban India in price range ofRs. 3-9 lakh in next decade

The company has partneredwith Monitor to test feasibilityof vision, provide in-depthknowledge of the market andassist in building theorganization structure

Tanaji Malusare City

Launched by MatheranRealty Pvt. Ltd. in Karjat

Aims to create large scalecommercially viable housingfor lowincome households

66,000 applications for saleof 3,000 units in Phase 1.

Will contain 15,000 flats

1

RMK 200 and 300 sq. ft. at2.1 lakh and 3.15 lakh,1BHK 400 sq.ft. at 5.25 lakhand 2BHK 500 sq.ft. at 7.35lakh


9/34Copyright 2009 Monitor Company Group, L.P. Confidential IND9

Affordable Housing

Low Income Housing as a Driver for Economic Growth

Wide Range of Benefits

Market based affordable hous ing c an be part of a broader port fo l io of so lut ions to

hous ing for the poor and lower income groups

Aiding Overall Economic

Development Construction of low income housing

provides disproportionate job creatiion

Creates signficant economic value forstate (taxes, anxiliary economicactivity, source of labor potentiallyleading to industry, etc

Provide alternative to Urban Slums

~40M people live in urban slums without basicfacilities 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 infrastructurewithin a city

Benefits for families of Urban LIG

Housing is essential for the well-being of afamily

Enhanced security and health throughorganized housing with access to sanitation

Access to better services (schools, healthcareetc.) which are typically available to higher-income groups

Creation of Low-Risk Asset for Families

Long term wealth creation due to value ofasset, saving on rent & collateral for loan

A security net in crisis

Low income houses typically built on land withlow cost per sq. ft. Low likelihood of pricedepreciation, Hence downside risk is low

Allows Government funds to focuson poor

Limited government resources can bespent on rental and owned housing forpoorer sections of society

Sets benchmarks that can be used forhousing for the poor


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Our path forward: Monitors 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

FacilitatingConsumer

Finance

Ensuring Supply ofHousing (DistinctBusiness 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 ofeach option and the situations where it would be effective

Working with the central Government and nodal agencies like NHB to transfer this knowledge tolocal decision makers.

SupportingGovernment Scale

up Low IncomeHousing

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.

FacilitatingBroader Market

Innovations


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Back-up

C fid i l


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Key Challenges and Critical Success Factors

Some traditional developers have expressed interest in low income housing because of thecurrent economic downturnonce the market recovers, may move out of this space

Most developers are building affordable homes that cost between Rs. 10-20 Lakhs, but the realneed 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 scaledevelopment of this market

There is a need for additional traditional financial institutions to serve the salaried low incomemarket, 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 iscurrently un-served because they are perceived as being high risk and high cost to serve

Facilitating

ConsumerFinance

Ensuring SustainedSupply of Housing in

the Rs. 3-7 LakhsRange

Several chal lenges w i l l need to b e addressed in o rder to enable the creat ion of a

robu st , comm ercial ly viable, and sus ta inable low inc ome housin g market in India

While the government is interested in stimulating private sector led approaches to low incomehousing, 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

SupportingGovernment Scale

up Low Income

Housing

The low income housing market will also require the creation of an enabling ecosystem throughinterventions/projects such as:

Introduction of Sustainability Elements, Development of Consumer Education Modules, Development ofa Paradigm for Low Income Rental Housing, Monitoring, Evaluating, and Spreading BestPractices/Addressing Unintended Consequences, Developing Architectural Benchmarks and Low CostConstruction 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 thesector, including warehouse facilities and securitization options etc.


Innovations

C fid ti l


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Facilitating Supply of Housing for Low Income Customers

Due to the economic downturn, some traditional developers have expressed interest in lowincome housing because of the current economic downturnonce the market recovers, maymove out of this space

Most developers are building affordable homes that cost between Rs. 10-20 Lakhs, but the realneed 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 soour approach will be reactive

For developers who are currently in (or interested in) this space, encourage them to buildhousing 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 groupsessions on areas like ways to lower cost of construction, sustainable elements, etc)

Approach

Challenge

We would l ike to ensure a susta ined s upp ly of h ousin g in th e Rs. 3-7 Lakhs range, and

faci l i tate the entry of n ew, sc ale players in to this market

C fid ti l


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Facilitating Consumer Financing for Low Income Customers

Access to home financing for low income customers remains the major choke point to the scaledevelopment 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 iscurrently 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 keychallenges 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 thismarket

Help them start an HFC. From designing the go-to-market strategy and configuration todeliver, 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 l ike to extend access to hom e f inancing to low inc ome custom ers, especial ly

inform al sector workers

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Supporting the Government to Scale Low Income Housing

The government, at the central and state level, is interested in facilitating the supply of affordablehousing 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, andbenefits 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 contextidentify the pros and cons of eachoption, 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 localdecision makers

Support a few ULBs on implementing these options and use this learning to refine the options

PreferredApproach

Challenge

We would l ike to work w ith centra l and s tate governm ents to devise ways to inc ent iv ize

the pr ivate sector to provid e access to low incom e housing

Leverage our networks to address Urban Local Bodies (ULBs) and state governments to raiseawareness of the potential for private sector led approaches to low income housing

Follow up with interested ULBs/States to raise awareness among developers in theirgeography

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 educationmodules

Short TermApproach

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Development and Facilitation of Market Innovations

The success of the affordable housing market in India will create a new group of home-ownersthat is unaware of the responsibilities of home ownership. We intend to:

Communicate key information on home/developer selection, financing, maintenance, and longterm value enhancement to this segment

Create modules in a format that is easily accessible to target segmentsi.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 wi l l be a custom er f inance modu le (in discus sion w ith FMO about funding)

The low income segments move from their current rental housing into the low income flats, theywill be among the first home-owners in this income group. While we expect the impact of movingfrom tenements and slums into homes in good neighborhoods to be positive, there are also likelyto 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 onthe 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 ofareas 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 otherrelevant stakeholders (RBI, NHB etc.) and engage relevant players in addressing theissues/opportunities (so these become the norm in the market

Monitoring,

Evaluating, andSpreading BestPractices/

AddressingUnintended

Consequences

Development andDissemination of

CustomerEducationModules

In addi t ion to our co re market making ef for ts , we intend to w ork o n specia l projects

that wi l l help create an enabl ing ecosys tem for the scalable grow th of low incom e

hou sing in India

Confidential


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Development and Facilitation of Market Innovations

The creation of the low income housing market offers a rare opportunity to introduce a new set ofenvironmentally sustainable elements in the market. If these elements are included in earlyprojects that are commercially successful, they are likely to be replicated by future entrants inthis 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 propagateinformation about them.

SustainabilityElements in LowIncome Housing

In addi t ion to our co re market making ef for ts , we intend to w ork o n specia l projects

that wi l l help create an enabl ing ecosys tem for the scalable grow th of low incom e

hou sing in India. These projects are pending fu nding from sp ons ors

There is a clear need for more and better quality rental housing, and there may be acommercially 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 rentalsthat the market can provide, regulatory issues, the potential of combining a rental modelownership 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 aParadigm for Low

Income RentalHousing

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 facilitiesand options for securitization

Including Low Income Housing in SEZs

Working with financial institutions to lower the cost of service for low income customers


MakingInnovations

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Monitor Group: An Introduction

Michael Porter,Harvard Business SchoolDirector and Co-Founder

of the Monitor Group

Founded by renow ned academic s, the Moni tor Group has grow n rapid ly to become a

leading glob al management con sul t ing and merchant banking f i rm

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 thathelp 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 StrategiesCluster Development Country

Competitiveness

Social Venture FundsImpact InvestingEducation Ecosystem

Confidential


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Monitor Inclusive Markets in India

An autonomous u ni t that is act ive ly faci l ita ting sc aling o f market based solut ion s

Customers

Developers

FinancialInstitutions

ConstructionTechnology

Identifying and refiningbusiness models at scale

Making the market for low incomehousing in India

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U b H i M k t 2007


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Urban Housing Market 2007

Smallest house costs ~ Rs. 5 Lakhs (~ USD 10,000)

Source: NHB Trends in Housing; CRIS Infac Report; Monitor Research

Urban India Expenditure &

IncomePyramid

16%(10MM)

37%

(~23MM)

33%(~21MM)

14%(~9MM)

MHE:

Rs 9,625 pm

MonthlyIncome

Rs. 11,000

USD 220

Rs. 2,500USD 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 acreavailable 45 minutes to 1 hourfrom city center, FSI of 1.8 givenfor 60% of the plot size

1RK flat at Karjat, (Mumbaisuburb) being sold at Rs 999per sqft

Land rate of 0.6 -1.2 Cr peracre available in Titwala, FSInorm of 1

Potential to provide housingat Rs 800Rs 1000 per sq.ft.However, overriding concernis financing of these houses

1BHK flats (450500

sq. ft.) being sold at Rs 9001,200 per sq. ft. in areassuch as Uppal, L B Nagar,Kuthapet, Kukatpalli etc. butnot on a large scale.

Confidential

Th t it S ll h i t i t t


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The opportunity: Smaller houses using current private sector

construction practices

Source: NHB Trends in Housing; CRIS Infac Report; Monitor Research

Urban India ExpenditurePyramid

16%(10MM)

37%(~23MM)

33%(~21MM)

14%(~9MM)

MHE:

Rs 9,625 pm

MonthlyIncome

Rs. 11,000

USD 220

Rs. 2,500

USD 50

Rs. 5,000

USD 100

Target segment for this project

250-400sq ft.

houses

Potential to provide housing for 1521 Million urban households

Cost Structure : Project IRR of 3040%

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%

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Efficient Use of SpaceSample Unit Layout

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I t t i H i


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Interest in Housing:

Focus Groups Household IncomeRs. 6,700- 7,700/month ($ 140)

Housing Concept3Tested with Respondents

Area: Housing is within 1 hourof 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 liftsand single set of staircases

Complex would have a compound wall with sharedopen 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

Al l respond ents were very

interested in th is con cept

Key is strong interest , proxim ity to faci l it ies (e.g. schoo ls, market places), conn ect iv i ty

v ia publ ic 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 ft3Housing concept tested is based on examples of larger (400-500 sq. ft) flats constructed in cities like Ahmedabad; 4The project team identified areas in thevarious 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 AffordableDown Payment

Rs. 70,000

Housing LoanTenure1

20 years

Current Rent(Large City)

Rs. 1,5001,800per month2

Current AverageSavings

Rs. 7001,000per month

Confidential


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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 TierI/II/III cities

Branch: Hub and Spoke model with 55 branches by Year 10

Target Monthly Household Income range: Rs. 5,00020,000

Customer groups: Both salaried customers who are unable to access home loans and informal sectorcustomers, i.e. self-employed and salaried unorganized individuals

CustomerProfile and

Focus

Product

Offerings andPricing

Structure

Primary Product: Loan for home purchase

Loan Amount: 28 Lakhs: Families earning between Rs. 5,000 and 20,000 can afford homescosting up to 40 times their monthly income, i.e. Rs. 310 Lakhs

Loan to Value: 5080%: A minimum of 20% equity from the customer will help mitigate thefinanciers risk, while ensuring that the loan is not sub-prime

Installment-Income Ratio (IIR): 30 - 40%: This income group typically pays between 20 - 25% oftheir monthly incomes as rent, so a 30 - 40% EMI is feasible

Loan Tenure: 615 years: Will vary based on the customers income

Pricing Structure

Adjustable Rate Mortgages with typical interest rates between 11 - 15% based on down-paymentamount, 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 bus iness wi l l pr im ar i ly focu s on the urban cus tom er in the Income Group Rs.

5,000-20,000 wh o do es not c urren tly have access to a hom e loan

A Low Income Housing Finance Business


25/34

Copyright 2009 Monitor Company Group, L.P. Confidential IND25

Per Customer Cost Analysis


Customer Level Economics: Branch Level Revenue & Costs

The average cost to acquire a customer is Rs. 8,000 and cos t to serv ice their loan ov er

the loan term is Rs. 20,000, while the net inc om e earned p er cus tom er is Rs. 88,000

CosttoServePerCustomer(Rs.)

IncomeEarnedPer

Customer(Rs.)

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 branchsales force as an incentive fee for each loangenerated

These assumptions are typical for most HFCs (our

data is based on inputs from Dewan, GRUH, HDFCand 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 includingother 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

SalesIncentive

OfficeOverheads

AverageNPA

Documentation,Storage &Retrieval

Legal &Technicalclearance

Total Costto Serve

OperatingOverheads

88,0004,00084,000

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

90,000

Processing FeeNet Interest Income Total

Per Customer Revenue Analysis



26/34

Copyright 2009 Monitor Company Group, L.P. Confidential IND26

Profitability over a 10 year time period


Profitability over a 10 year time frame

The HFC wil l tur n pro f i table after 3 years of o perat ions , and it is antic ipated that

margins w i l l grow sequent ia l ly in progressive years

NetProfit/

(Loss)(Rs.crores)

PercentageRetu

rn

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 (towardssoftware 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 fewyears, but will turn profitable by year 3

ROE of 23% in year 10 is very robust by theIndian financial industry standards

ROA of 3% in year 10 is comparable to HFCindustry standards

276.9

52.627.316.0

5.60.8-1.2-2.8

-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

23.022.0

19.017.0

13.0

10.0

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 Equity

Return On Assets

Confidential

Low Income Segments as Target Market


27/34


Low Income Segments as Target Market

Untested Risk Profiles, different from Sub-prime in USA

75-80% LTVsignificant individualcontribution required; EMIs tend to be 35%of Monthly Income

Target customers have regularemployment, albeit with low incomewithan 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 ofasset and replacement cost; and hencelower risk of asset bubbles

Low-Income Housing in India

Outcome: Untested, relat ively

low-r isk segment with

s igni f icant bus iness potent ia l

Very high LTV; creative structuresdeveloped to reduce EMIs

Loans extended without dueconsideration to ability to pay (basisemployment history)financingprovided to those with questionable

employment record Cost of asset disproportionately high

compared to replacement cost; this isattributed to the real estate asset bubblein the UShence high risk of paymentdefault

Sub-prime Experience in USA

Outcom e: Sub-pr im e Defaul ts

and Foreclosures

Confidential



28/34


Construction Laborer in India


Significant Employment Potential to Lower-Income Segments

1,300

Capital2

550

RawMaterial3

400

GrossMargin

Labor

3,000

750

Total

250

LaborCapital

250

400

GrossMargin

RawMaterial

1,200

300

Total

Low Income Housing ProjectTraditional Housing Project

Note:2Includes land costs, design expenses and equipment costs; 3Includes cost for steel, cement, tiles etc;Source: Construction Industry Development Council Report, Industry Experts, Monitor Analysis

Largest spendon labor

Within the constru ct ion ind ustry w hich is the largest employers of labor in urban India,

affordable housin g emerges as the most labor- intensive pro vid ing h igh po tent ial for

employment oppor tun i ty to the urban poor

With 31 million workers(2005), the ConstructionIndustry is the leading providerof employment to lowerincome segments in UrbanIndia

A typical construction workeris from states withlower economic

development (U.P.,Bihar), a dailywage earner

(income of ~Rs 100 per day),resides in temporary

settlement near constructionsite and has been badly hit byinflation and slowdown in

construction industry

Comparison of spend on Labor in Construction Projects(as % of total Project Value)

13% 25%

Confidential

Interviews with over 30 Housing Developers


29/34


Interviews with over 30 Housing Developers

Interest in Low Income Housing

Large pr ivate developers are not interested in the segment unless i t faci l ita tes accessto addi t ional land for h igh end pro jects whi le some medium / sm al l pr ivatedevelopers are interested in s erv ing the segment prov ided they get suf f ic ient

volum es and f inancing is avai lable for custom ers

Large Private Developers Medium and Small Private Developers

Very limited interest in building housing for low incomecustomers

Developers believe that there is still a largeopportunity in housing for middle income andhigher income segments

Recognize land as an extremely valuable resourceand consider stand alone low income housingprojects as sub optimal utilization of available land

Not willing to compromise on profit margins

Believe that it is difficult to make housing atprice affordable for low income segment

Interested in looking at housing for low incomecustomers only if developing such housing helps themacquire land (from the government) for high endresidential and commercial projects

Willing to cross subsidize low income houses

Believe that there is high competition in the middlesegments and market is saturating

Some medium and small developers recognize theopportunity 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 whileearning close to their current margins (20-30%)

However, need comfort that they will get sufficientvolumes from this segment; concerned about nonavailability of housing finance to the segment

Some developers have also expressed interest inbeing part of a pilot project

Confidential


30/34


Financial Institutions: Current Market Focus

The target segm ent is largely u n-served select medium sized HFCs and banks have asmal l presence amo ng cu stom ers (pr imar i ly salar ied) with hou sehold income above Rs.

5,000 per mon th

> 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

TargetSegments

fortheProject

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

Confidential


31/34


Payroll deduction Facilitates aggregation

and information oncustomers

Retention tool High productivity

New Housing Business Model: Salaried Sector

The new pro duc t for those employ ed in formal sector set t ings required several

reconf igurat ions o f exist ing p rodu cts and pract ices, with a direct l ink to cu stom er

employers

Developer

(Small andMedium)

FinancialInstitution

Employer

Developer

(Small andMedium)


Employer

FormalSector

Customers

Opportunity to Set Standards:Architectural Design, Maintenance, Consumer Education

Construction Finance

No construction finance(concern on buyers / delays)

FormalSector

Customers

Developer puts 500 sq.ft.+

apartments on market in

phases (34 years) and gets

individual, walk in customers

Serve 1 customer ata time, wont financebelow Rs. 12,000/month

Affordable

200-350 sq ft

uni ts , good

quality, no

delays

Upfront,

f inanced,

aggregated

customers

Loans ataffordablerates

Aggregated low

risk, low cost toserve customers

Current Bottom of the Market (12k20k) Alternative Model Serves 6k12k Market

Uncertainty of Sales Sales and Mktg. costs Funding constraint

Risk of Delays

Retention issues

Confidential


32/34


Financialreturn withalignedincentives

Aggregatedcustomers

Potentially

low risk Low cost to

serve

Aggregatedcustomers

Use of tools suchas rolling guaranteeto reduce risk

Credit check,collection, consumereducation

Uncertainty of Sales Sales and Mktg. costs Funding constraint

Risk of Delays

Developer

(Small andMedium)

New Housing Business Model: Informal Sector

The new prod uct for thos e emp loyed in informal sector set t ings may require the

introdu ct ion of MFIs as an aggregator and p otent ial ly a credi t guarantor to incent iv ize

f inancing


Current Bottom of the Market (12k20k) Alternative Model Serves 6k12k Market

Developer

(Small andMedium)

Customers

MFI


CreditGuarantee

ConstructionFinance

Affordable

200-350 sq ft

uni ts , good

quality, no

delays

Upfront,

f inanced,

aggregated

customers

Often will not finance

InformalSector

Customers

No construction finance(concern on buyers / delays)

Developer puts 500 sq.ft.+

apartments on market in

phases (34 years) and gets

individual, walk in customers

Confidential


33/34


Summary of Various Affordability Levers

Various qu ant i f iable af fordabi l ity levers signi f icant ly di f fer from each o ther in terms of

impact on affordabi l i ty and feasib i l ity

Note: 1 Sales Tax and Excise Duty Exemption;The numbers in the graph represent the percent reduction of gap in affordability due to the leverSource: Discussions with Industry Participants, Monitor Analysis

LandSubsidy

SubsidizedConstructionmaterial

Bulk MaterialPurchase

LongerTenure Loan

Stamp Duty andRegistration

waiver on Land

FSIIncrease

TaxConcessions1

InterestSubsidy

Semi FinishedConstruction

Low CostConstruction

Small SizedHouses

MediumHigh LowFeasibi l i ty

Stamp DutyExemption

to CustomerIncome taxExemption toDeveloper

Registration Fee sWaiver to Customer


34/34

Sales and MarketingProject implementation

Support provided across the affordable housing value chain

Development ofbusiness planincluding strategy

Organization designand structure

Roles andresponsibilities

Identification offunctions that can beoutsourced/inhouse

Project/BusinessEconomics

Sensitivities of planto approval process,construction costsand time, salesefficiencies, etc

Business Blueprint

Business Planningand Organization

Design

Landselection

andvalidation

Design andDevelopmen

t

Productmix andpricing

Salesprocessdesign

Training ofclient team

Databank of unitlayouts (Lowercost and increasevalue to customer)

Improve mix ofcommercial andresidential toimprove returns

Databank of sitelayouts toincorporate open,green spaces,

max FSI, etc.)

Strategy toreach out todifferent sets ofcustomers

Building thesales processfrom the time acustomer walksin to the projectuntil the timepossession ishanded over tothe customer.

Templatizeprocesses

Access to Monitor Networks

Financing

End to end handholding : Base IP and customized application; Decision support and overall knowledge

Access tohousing

financingcompanies

Access to targetedfinancing for specificprojects

Access to double-bottomline funds forinvestment at abusiness level

Access to PE fundsinterested ininvesting inaffordable housing

Developing list ofattractiveness criteriaas well as inhibitingfeatures to evaluateareas for determiningbuy decision

Validation of selectedland parcels

Facilitating site visitsby potentialcustomers to

determineattractiveness anddemand.

Project phasing

Developingoptimal productmix given FSInorms and desiredreturns

Differentialproduct pricing

Work withbanks, MFIs andspecializedinstitutions toenable access tofinancing optionsfor customers atbooking stage

Tie-ups withfinancialinstitutions forboth formal andinformal sector

customers

Structure team inorder to achievelong termcompetencies inselling

Train team to beable to do this atscale acrossprojects

Monitors Value Proposition to Developers

2010 01 27 SAHF - Monitor Presentation

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