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Current Urban Housing Market: Smallest house costs
~ Rs. 5 Lakhs
Source: NHB Trends in Housing; CRIS Infac Report; Monitor Research
Urban India — Expenditure & Income Pyramid
16%(10MM)
37%(~23MM)
33%(~21MM)
14%(~9MM)
MHE: <Rs 2,500 pm
MHE: Rs 2,500–
Rs 4,575 pm
MHE:Rs 4,575–
Rs 9,625 pm
MHE: >Rs 9,625 pm
Monthly Income
Rs. 11,000
Rs. 2,500
Rs. 5,000
LESS THAN TOP 16% of Urban Indian LESS THAN TOP 16% of Urban Indian
Households can afford to own housesHouseholds can afford to own houses
LESS THAN TOP 16% of Urban Indian LESS THAN TOP 16% of Urban Indian
Households can afford to own housesHouseholds can afford to own houses
Current segment served
Ahmedabad / Vadodara
Mumbai
Jaipur
Hyderabad
Multiple builders: “Three room” flats @ Rs 950 / sq. ft.– Vatwa, 12 km from city
centre; 40 minutes travel, Naroda
Land rate of 80L to 1.1 Cr per acre available 45 minutes to 1 hour from city center, FSI of 1.8 given for 60% of the plot size1
Multiple builders: “Three room” flats @ Rs 950 / sq. ft.– Vatwa, 12 km from city
centre; 40 minutes travel, Naroda
Land rate of 80L to 1.1 Cr per acre available 45 minutes to 1 hour from city center, FSI of 1.8 given for 60% of the plot size1
1RK flat at Karjat, (Mumbai suburb) being sold at Rs 999 per sqft
Land rate of 0.6 -1.2 Cr per acre available in Titwala, FSI norm of 1
1RK flat at Karjat, (Mumbai suburb) being sold at Rs 999 per sqft
Land rate of 0.6 -1.2 Cr per acre available in Titwala, FSI norm of 1
Potential to provide housing at Rs 800–Rs 1000 per sq.ft. However, overriding concern is financing of these houses
Potential to provide housing at Rs 800–Rs 1000 per sq.ft. However, overriding concern is financing of these houses
1BHK flats (450–500 sq. ft.) being sold at Rs 900–1,200 per sq. ft. in areas such as Uppal, L B Nagar, Kuthapet, Kukatpalli etc. but not on a large scale.
1BHK flats (450–500 sq. ft.) being sold at Rs 900–1,200 per sq. ft. in areas such as Uppal, L B Nagar, Kuthapet, Kukatpalli etc. but not on a large scale.
Customer Perspective: Social Need and Willingness to Pay
(16 Focus Groups and over 2,000 potential customers)
Detailed customer research and our interaction with customers on the ground showed high need for a “house of their own” among people living in appalling living conditions
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.
Profile - NathubhaiProfile - Nathubhai
Source: Primary Research (n=2000), Monitor Analysis
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
Profile - GaneshProfile - Ganesh
Both share a dream…“A house of their own”Can afford a 250-350 sq ft. house, willing to make 20% down payment &
pay 35% of monthly income as EMIs to realize their dream
Both share a dream…“A house of their own”Can afford a 250-350 sq ft. house, willing to make 20% down payment &
pay 35% of monthly income as EMIs to realize their dream
Lives in 1 RmK in low income neighborhood, Rent Rs 1800
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
Live in poorly Live in poorly constructed small constructed small cramped housescramped houses
Poor sanitary Poor sanitary conditions - conditions - shared toilets, bad shared toilets, bad drainage, water drainage, water logging during logging during monsoonsmonsoons
Lack of facilities - Lack of facilities - properly planned properly planned access points, access points, walkways, walkways, gardens, gardens, dedicated schools dedicated schools etc. etc.
Increasing supply of housing but lack of access to finance
Ahmedabad: Vatva
Taral Bakeri
Phase 1: 800 units
Price: Rs 3.3 Lakh– 5.6 Lakh
Mumbai :Ambivili
Neptune Group
100 acres
Phase 1: 1800 units; Sector 1: 600 flats sold out in 3 days
1-BHK and 2-BHK
Rs 4.73 Lakh and Rs 8.40 Lakh
Maharashtra: Karjat
TMC – Matheran Realty
15,000 units by June 2011;
3,000 units in Phase 1 –
June ’09
6,000 flats @ Rs 3 Lakh
Maharashtra: Boisar
Tata Housing
67 acres: Phase 1: 1200 units for LIH1-RMK and 1BHK
Rs 3.9 Lakh and Rs 6.7 Lakh
Bangalore: Atibele
Janadhar
11 acres: 1500 units1BHK and 2 BHK; Rs 4 Lakh and 6 Lakh
Bangalore: Value Budget Housing
Development Corporation
Rs 3-9 Lakh townships on minimum 10 acre plots; 1 Million intended flats
Large real estate players like the Tatas and entrepreneurs like Jerry Rao are starting to recognize the business Large real estate players like the Tatas and entrepreneurs like Jerry Rao are starting to recognize the business potential of low income housing and constructing large projects, thereby giving the field increased credibilitypotential of low income housing and constructing large projects, thereby giving the field increased credibility
There is increasing construction of low income projects across India but access to home financing for low income customers is the major choke point
• ““The biggest challenge for our customers is accessing loans - 1,700 out of 3,000 customers in Phase 1 wanted loans and out of these 1,300 have The biggest challenge for our customers is accessing loans - 1,700 out of 3,000 customers in Phase 1 wanted loans and out of these 1,300 have got sanctions after 6-8 months. There are still 400 customers who are trying to get loans”- Joe Silva, Chairman and CEO, Matheran Realty Pvt Ltd- got sanctions after 6-8 months. There are still 400 customers who are trying to get loans”- Joe Silva, Chairman and CEO, Matheran Realty Pvt Ltd- Promoters of TMC.Promoters of TMC.
• ““We find many people willing to buy our flats in Ambivilli like drivers, shop keepers and even priests, however their biggest problem is accessing We find many people willing to buy our flats in Ambivilli like drivers, shop keepers and even priests, however their biggest problem is accessing finance in buying our flats”- Nayan Shah, Director of Neptunefinance in buying our flats”- Nayan Shah, Director of Neptune
• ““Ever since we launched, we have been getting enquiries almost every day on housing loans from informal sector customers. The challenge has Ever since we launched, we have been getting enquiries almost every day on housing loans from informal sector customers. The challenge has been to service all such requests”- Rajnish Dhall, Promoter MHFCbeen to service all such requests”- Rajnish Dhall, Promoter MHFC
Largely Un-servedSome PSU schemes, but difficult to access loans due to bureaucracy; staff incentives geared towards disbursement targets
Barriers to entry for Banks and Housing Finance Companies
The majority of Banks and Housing Finance Companies are reluctant to serve customers in the informal sector because of the uncertainty of their risk profiles
Select HFCs (e.g., DEWAN HOUSING)Alternate means of income assessment for higher income customers such as supplier and customer checks, or MFI and chit fund savings history; guarantor typically required
Urban The need for low income housing and home loan financing is especially acute in urban areas, which are seeing rapid population expansion through migration from rural areas
Reach: The HFC will have an urban focus and will establish presence in Metros and surrounding Tier I/II/III cities
Branch: Hub and Spoke model with 55 branches by Year 10
Target Monthly Household Income range: Rs. 5,000 – 20,000
Both salaried customers who are unable to access home loans and informal sector customers, i.e. self-employed and salaried unorganized individuals
Customer Profile and
Focus
Product Offerings
and Pricing Structure
Primary Product: Loan for home purchase
Loan Amount: 2 – 8 Lakhs: Families earning between Rs. 5,000 and 20,000 can afford homes costing up to 40 times their monthly income, i.e. Rs. 3 – 10 Lakhs
Loan to Value: 50 – 80%: A minimum of 20% equity from the customer will help mitigate the financier’s risk, while ensuring that the loan is not sub-prime
Installment-Income Ratio (IIR): 30 - 40%: This income group typically pays between 20 - 25% of their monthly incomes as rent, so a 30 - 40% EMI is feasible
Loan Tenure: 6 – 15 years: Will vary based on the customer’s income
Pricing Structure
Adjustable Rate Mortgages with typical interest rates between 11 - 15% based on down-payment amount, IIRs, loan Tenure, and perceived risk profile of customer; and allowing approximately a 3-4% spread
Processing fee of 1% of loan value to re-cover loan origination and credit check costs
The business will primarily focus on the urban customer in the Income Group Rs. 5,000-20,000 who does not currently have access to a home loan
Portfolio Growth Projections over 10 yearsPortfolio Growth Projections over 10 years
A Low Income Housing Finance Business
Projected Revenue Potential for a Housing Finance Business
A housing finance business can achieve significant growth over a 10 year period, disbursing close to 260,000 loans worth ~ Rs. 10,000 Crores and turning profitable in year 3
37,50018,750
9,3753,7501,5005000
50,000
100,000
150,000
200,000
250,000
300,000
Y2Y1 Y10
258,398
Y9
172,266
Y8
114,844
Y7
65,625
Y6Y5Y4Y3
Cu
mu
lati
ve G
row
th in
Lo
ans
Cu
mu
lati
ve V
alu
e o
f L
oan
s D
isb
urs
ed
(Rs.
Co
res)
Assumptions1 Assumptions1
Since the HFC market is extremely underpenetrated – it is feasible to assume Year on Year growth rates between 50 – 200% for a start-up, decreasing yearly
Average Ticket Size is Rs. 4 Lakhs
Interest Rate: 14%; Gross Spread of 4%
Loan To Value: No more than 80%
Sanction and Disbursal: 12 month time lag between disbursement and commencement of principal repayment
Scheduled loan Tenure is 15 years
The average loan gets repaid in 8 years and there is no prepayment penalty
Since the HFC market is extremely underpenetrated – it is feasible to assume Year on Year growth rates between 50 – 200% for a start-up, decreasing yearly
Average Ticket Size is Rs. 4 Lakhs
Interest Rate: 14%; Gross Spread of 4%
Loan To Value: No more than 80%
Sanction and Disbursal: 12 month time lag between disbursement and commencement of principal repayment
Scheduled loan Tenure is 15 years
The average loan gets repaid in 8 years and there is no prepayment penalty
ObservationsObservations It is possible to model more aggressive or
conservative growth scenarios based on the capital available, high level strategic objectives (desired share of the market) of the promoters, supply of low income housing stock etc.
Cumulative Portfolio Size is dependent on Average Ticket Size of loan, with bigger loans resulting in a larger book size
It is possible to model more aggressive or conservative growth scenarios based on the capital available, high level strategic objectives (desired share of the market) of the promoters, supply of low income housing stock etc.
Cumulative Portfolio Size is dependent on Average Ticket Size of loan, with bigger loans resulting in a larger book size
Cumulative Number of Loans Disbursed
Note: 1 Assumptions are based on interviews with Dewan Housing Finance Company, MAS Rural Housing and Finance, MHFC, and Fullerton Capital
10,336
1,500750
37515060200
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
9,000
10,000
11,000
4,594
2,625
Y10
6,891
Y9Y8Y7Y6Y5Y4Y3Y2Y1
Cumulative Amount of Loans Disbursed (in Rs Crores)
Per Customer Cost AnalysisPer Customer Cost Analysis
A Low Income Housing Finance Business
Customer Level Economics: Revenue and Costs at Branch Level
The average cost to acquire a customer is Rs. 8,000 and cost to service their loan over the loan term is Rs. 20,000, while the net income earned per customer is Rs. 88,000
Like microfinance, low income housing finance is a fundamentally different business model than traditional housing finance, and requires completely distinct processes to appropriately assess customer credit worthiness and risk
SE
LF
EM
PL
OY
ED
SA
LA
RIE
D
Illustrative Credit Appraisal Process for Low Income Informal Sector Customers
•Credit appraisal to accurately understand element of risk within the informal sector requires proxiesfor traditional income documents
•Due to the lack of income proof and other verification, the informal sector requires a more ‘field-based’ approach to verifying income and credit worthiness including visits to the customer’s business, conversations with NGOs/
chit funds/local institutions the customer is linked to etc.
•Credit appraisal to accurately understand element of risk within the informal sector requires proxiesfor traditional income documents
•Due to the lack of income proof and other verification, the informal sector requires a more ‘field-based’ approach to verifying income and credit worthiness including visits to the customer’s business, conversations with NGOs/
chit funds/local institutions the customer is linked to etc.
Low Income Housing Finance: Potential Role of MFIs
Profile and InterestProfile and InterestProfile and InterestProfile and Interest Interests of select leading urban MFIs Interests of select leading urban MFIs Interests of select leading urban MFIs Interests of select leading urban MFIs
Most MFIs in India are largely active in rural areas
However, there are a few MFIs which cater mainly to the urban
poor e.g., Ujjivan, Swadhaar, SatinCare, etc
– Most have small loan portfolios and small customer bases
Provide short tenure loans (6 months-5 years) for house repairs,
livelihood generation and consumption etc.
Most MFIs do not have the necessary scale to undertake risk
sharing, although some are willing to undertake part risk if
provided with long term line of credit
Interested in providing support (for a fee) in demand aggregation,
credit evaluation, loan distribution and collection etc.
Some MFIs, not keen on risk sharing, are willing to align
incentives to provide additional comfort to FIs
– Incentives linked to collection in case of agency role (the
model has not been tried out hence MFIs have not through
about desired incentive structure)
Collection and Collection and DistributionDistribution
Collection and Collection and DistributionDistribution
Note: 1 Share MFI open to share client history, credit risk assessment or play an agency role in collection and distribution only if the activities are bundled with potential risk sharing role; 2 Willing for part risk sharing and need to discuss with banks to understand exact risk sharing mechanism
MFIs may be well placed to serve as conduits for housing finance or even set up dedicated HFCs because of their access and understanding of low income informal sector customers and the unique processes required to best serve them
2
1
1
2
Urban MFIs can either set up dedicated HFCs (such as MAS), or can assist traditional banks and HFCs interested In serving low income informal sector customers with customer pre-selection, credit appraisal, demand
aggregation, payment collections, risk assessment etc.
According to many MFIs, ‘the ultimate aspiration for their customers is to own their own homes, and all other loans are merely a band-aid for a housing loan.’
Urban MFIs can either set up dedicated HFCs (such as MAS), or can assist traditional banks and HFCs interested In serving low income informal sector customers with customer pre-selection, credit appraisal, demand
aggregation, payment collections, risk assessment etc.
According to many MFIs, ‘the ultimate aspiration for their customers is to own their own homes, and all other loans are merely a band-aid for a housing loan.’
Note: 1 Monthly Household Income; 2 Affordability defined as households which have EMI / MHI Ratio of 40% of a Home loan which has a 20% down payment on an Home value, EMI level of Rs 1,200 per Lac (at 12% interest for a 15 year loan); 3 Conservative 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 Lacs 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: The Economic Potential
The low-income housing segment (MHI of Rs 5,000 – 20,000) is estimated at 22 Million households with an estimated opportunity size of Rs. 1,100,000 Cr and is largely underserved
Urban Income Pyramid Offering & Supply of Housing
Price of unit: Rs 10–25 Lacs 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)
10000–20000
>80000
30000–40000
<5000
40000–80000
31%(21.1MM)
5%(3.4MM)
5000–10000
20000–30000
MHI1
(Rs)
Price of House: Rs 3–10 Lakhs 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 ~ Rs 8,80,000 Cr
There are 45 registered HFCs in India, and these are split almost evenly between organizations that can accept deposits from the public and those that cannot
• Haware’s Housing Development Finance Corporation
• India Home Loans Limited
• Mahindra Rural Housing Finance
• Micro Housing Finance Corporation
• Swagat Housing Finance Company
• Reliance Home Finance
• India Infoline Housing Finance
• Tata Capital Housing Finance
• Can Fin Homes
• DHFL Vyasa Housing Finance
• Manipal Housing Finance Syndicate
Cent Bank Home Finance
• GIC Housing Finance
• HDFC
• ICICI Home Finance
• Dewan Housing Finance Corporation
• LIC Housing Finance
• AIG Home Finance India
GRUH Finance
• Sundaram BNP Paribas Home Finance
• REPCO Home Finance
• Ind Bank Housing
• National Trust Housing Finance
• Vishwakriya Housing Finance
• HUDCO
• IDBI Home Finance
• PNB Housing Finance
• Deutsche Postbank Housing FinanceMAS Rural Housing
and Mortgage Finance
• HBN Housing Finance
• Indiabulls Housing Finance
• GE Money Housing Finance
• Maharishi Housing Development Finance Corporation
Low Income Segments as Target Market: Largely-Untested Risk
Profile, different from Sub-prime in the USA
75-80% LTV – significant individual contribution required; EMIs tend to be 35% of Monthly Income
Target customers have regular employment, albeit with low income – with an unproven credit record which needs to be tested
In the low income segment, relatively low cost of land (esp. in peri-urban areas) leads to high correlation between cost of asset and replacement cost; and hence lower risk of asset bubbles
75-80% LTV – significant individual contribution required; EMIs tend to be 35% of Monthly Income
Target customers have regular employment, albeit with low income – with an unproven credit record which needs to be tested
In the low income segment, relatively low cost of land (esp. in peri-urban areas) leads to high correlation between cost of asset and replacement cost; and hence lower risk of asset bubbles
Low-Income Housing in IndiaLow-Income Housing in India
Outcome: Untested, relatively low risk segment with significant business potential
Very high LTV; creative structures developed to reduce EMIs
Loans extended without due consideration to ability to pay (basis employment history) – financing provided to those with questionable employment record
Cost of asset disproportionately high compared to replacement cost; this is attributed to the real estate asset bubble in the US – hence high risk of payment default
Very high LTV; creative structures developed to reduce EMIs
Loans extended without due consideration to ability to pay (basis employment history) – financing provided to those with questionable employment record
Cost of asset disproportionately high compared to replacement cost; this is attributed to the real estate asset bubble in the US – hence high risk of payment default
Sub-prime Experience in USASub-prime Experience in USA
Establishing a Housing Finance Company: Monitor Inclusive
Markets’ Role
Introduce the concept of housing finance and disseminate information on the commercially viable business opportunity to provide housing finance to low income customers to broad groups of stakeholders
Actively assist new players interested in entering the HFC space with their market entry strategies and business plans
Disseminate Disseminate Concept & Help New Concept & Help New
Players Adopt the Players Adopt the Business ModelBusiness Model
Disseminate Disseminate Concept & Help New Concept & Help New
Players Adopt the Players Adopt the Business ModelBusiness Model
Monitor is well positioned to help incubate new Housing Finance Companies focusing on the low income sector, through its knowledge of the low income space in India as well as its deep networks
Assist in preparation of Information Memorandums for HFCs looking to raise funds
Connect HFCs to Private Equity investors looking to invest in the low income housing finance ecosystem
Actively assist in the fundraising process through broader introductions and brokerage with sources of capital such as multilateral institutions, foundations, impact investing networks etc.
Facilitate Access to Facilitate Access to CapitalCapital
Facilitate Access to Facilitate Access to CapitalCapital
Assist entrepreneurs through our knowledge of the process of setting up an HFC and introductions to experts and prior successful applicants
Connect the HFC to lawyers and technical experts with deep expertise in housing finance
Introduce the HFC to Monitor’s vast networks of developer partners, and facilitate tie-ups between the HFC and specific low income housing projects
Link HFC to key Link HFC to key players in the Low players in the Low Income Housing Income Housing
Ecosystem through Ecosystem through Monitor’s networksMonitor’s networks
Link HFC to key Link HFC to key players in the Low players in the Low Income Housing Income Housing
Ecosystem through Ecosystem through Monitor’s networksMonitor’s networks