Expanding Housing Finance to the Underserved in South Asia Market Review and Forward Agenda South Asia Regional Housing Finance Conference January 27-29.

Expanding Housing Finance to the Underserved in South Asia

Market Review and Forward Agenda

South Asia Regional Housing Finance ConferenceJanuary 27-29 2010, New Delhi, India

Background• More than a billion people around the globe, and over 14

percent of South Asians, live in inadequate housing• South Asia’s housing and housing finance markets are

dynamic and grew at a very high 30% in the past five years, but are limited in their outreach, catering to upper income groups.

• Housing and housing finance services have the potential to be expanded to middle- and even lower- income families.

• The challenge is that South Asia is home to about half of the world’s poor, who require more complex housing solutions as existing market terms are not directly affordable to them.

Importance of Housing• Contributes to overall economic growth, social uplift and employment. • Deepens, broadens and stabilizes the financial sector.• Accounts for 75-90% of household wealth in emerging market

countries. • In South Asia, 40-50 industries are directly linked with housing

construction.• Construction and related sectors constitute 9% percent of the labor

force worldwide. • Housing investment accounts for 15-35% of aggregate investment.• Housing makes 15-40% of monthly household expenditure worldwide. • Mortgage debt constitutes about 30% of GDP worldwide, and only

3.42% in South Asia.• Increases national savings and investment, and contributes towards

poverty reduction.

Housing Debt to GDP (percent)

Growth potential of Housing Finance

• The world population is expected to reach 7.9 - 10.9 billion by 2050. Within the next two decades, 60% of the world’s people will reside in urban areas.

• Rapid economic growth in the South Asia region, coupled with significant population increases and growing urbanization trends makes for a considerable potential for housing and housing finance growth.

• Household size is shrinking, and a significant middle class will be forming in the coming decades, mostly composed of young people who are eager to have their own, albeit modest, home.

• The averse attitudes to debt are changing, particularly for home ownership.

• These developments are propitious to a scaled-up outreach of housing and housing finance markets.

• And private sector lending for housing would free scarce government resources for other social and economic needs.

GDP growth and urbanization

Estimates of the growth potential• Difficult to make precise estimates of the growth potential of the housing

and housing finance sectors in South Asia. Some tentative projections:

– Afghanistan: $2.5 billion investment ($276 million a year financing needs) in Kabul’s informal housing sector alone.

– Bangladesh: 3.5 million new rural houses required, and about 1.9-3 million dwellings require incremental construction and repair.

– India: US $108 billion investment up to 2012. – Pakistan: US$5.6 billion investment for 2009 alone (US$2 billion or

1.26% of GDP financing need) for 470,000 housing units. – Sri Lanka: up to US$8.8 billion financing needs by 2020.

Expanding access to middle /lower-income groups: developing a sound and accessible market

The markets need balanced funding models, diversified instruments, sound housing prudential regulations, innovative products, and affordable mortgages.

• Complicating factors– Deficient financial systems.– Inefficient regulatory regimes – foreclosure and land administration.– Other: sluggish building supply; poor low income housing policies; and lack of

commercially viable housing microfinance lending. • Promising aspects:

– Islamic finance could help access underserved market segments. – Secondary market finance is key to long-term funding and stabilization of

mortgage markets.– Public-private partnerships and creative cooperative solutions are promising.

A shortage of over 38 million housing units in the region

24.7m5m

1m7.6m

0.65m

• There are an estimated 212.5 million homeless people in South Asia, out of a total region population of 1.5 billion (14 percent).

• Worse urban shortages are hiding behind squatter settlements and higher persons per room density.

The Glum Reality in the SlumsCountry Slums’ Statistics

Afghanistan 80 percent of the Kabul population (2.44 million) live in slums

Bangladesh 2,100 slums; more than 2 million people in Dhaka live either in slums or are without any proper shelter

India 52,000 slums holding 8 million urban households, representing about 14 percent of the total urban population.

Pakistan Karachi alone has between 600-800 slums, sheltering about 7.6 million (or 1 million households) out of the total city population of 15.1 million people

Sri Lanka A considerable share of the population of Sri Lanka lives in plantations, slums and shanties.

Housing Supply in South Asia

• Purely government solutions at such scale are difficult - a large-scale market solution is required.

• Success stories exist (e.g. India) - viable and profitable models to serve lower-income groups.

• Developer finance and efficient land administration are required for low-cost development to be profitable.

• Sound governance, professional standards and norms, transparency, and good consumer protection will help as well.

• Construction quality and construction standards are important.

Prevalence of Temporary Housing in South Asia

Country Temporary Housing

Afghanistan No data

Bangladesh 50 percent of all housing

India 45 percent of all housing

Pakistan 39 percent of all housing

Sri Lanka 20 percent of housing units have mud floors

Real estate prices; secondary markets

Unprecedented rise in South Asian property prices impairs affordability. • Driven by the cost of land and construction materials, rising demand,

urbanization, high economic growth, increasing remittances, limited availability of land, speculative trade in real estate.

Country Cost to construct low-income housing (per square foot)Afghanistan $15 to $20Bangladesh $27India $20 to $22Pakistan $9.6 to $12Sri Lanka increased about threefold between 1990-2005

• Sluggish and in transparent secondary markets for property. • Dual pricing system due to high property costs and taxes. • Lack of secondary housing market infrastructure.• Weak foreclosure enforcement.

Growth Rates of the South Asia Housing Finance Industry 2007-2008

Housing finance markets• Generally dominated by the banking sector• Mortgage products : inflexible, unaffordable, geared to high-income customers• Lower-income groups mostly serviced by state-owned banks.

Country-specific features:• Afghanistan – one of fastest growing and most limited outreach. Major laws being

currently adopted, and remaining to be implemented. • Bangladesh – nationalized commercial banks and private and foreign commercial

banks hold 23.6 percent and 35.7 percent market share, respectively. • India – a variety of financial institutions, including non-banking housing finance

companies, but still a concentrated market, with four financial institutions controlling more than two thirds.

• Pakistan – the second fastest-growing and limited outreach country in the region. • Sri Lanka – banks and state-owned specialized mortgage lenders are the sole

players in the country’s market.

Typical Mortgage Terms in South Asia

Country Typical Mortgage Terms

Afghanistan $10,000-$20,000, 12%, 20 year maturity

Bangladesh $36,300-$43,600, 14-15%, 10-15 year maturity, restrictive loan-to-cost maximums (capped at 70% generally, but averaging 50% in practice). Interest rates mostly variable

India $30,000 on average, 12%, 13 years maturity, plain vanilla home amortizing loans, on predominantly floating rates and with prepayment penalties, average loan to value ratio of 65% (maximum 85% at origination)

Pakistan $21,000-$44,400 on average, 15-17%, 12.5 years maturity on average

Sri Lanka $10,000-$40,000, 15-17%, 15-25 year maturity on average, generally fixed rates by state-owned banks and variable rates by private banks

Total Mortgage Balances Outstanding and Market Shares, by country

Country Bank Mortgage Financing

State Specialized Mortgage Financing

Private Specialized Mortgage Financing

Islamic Mortgage Financing

Afghanistan 100% (a) 0% 0% included in (a)

Bangladesh(Tk. 142.4 bn)

64% 17% 12% 7%

India(IRs. 3,970 bn)

66% (b) 4% 30% included in (b)

Pakistan(Rs. 89.9 bn)

76% 13% 0% 11%

Sri Lanka(Rs. 181 bn)

75% 25% 0% 0%

Housing Finance Market Players• In addition to the dominant banking sector and state-owned housing banks,

there is a diverse team of housing finance players:– Specialized housing finance companies (India, Bangladesh). Innovative,

serve lower-income groups, but starved of long-term, low-cost funding.– Islamic housing finance instruments (e.g. diminishing Musharakah,

murabaha). Growing substantially, massive untapped potential, still not focused on lower-income home financing.

– Informal housing finance - Low-income groups in South Asia, rural dwellers, and those with irregular or informal incomes fund their homes through savings and family / friends.

– Microfinance housing lending –for home improvement, not purchase. Diversified products, segmented clients, handle risk better, lack funding.

– Large-scale project finance – lacking, developers fund out of equity.• Incipient experimentation with second-tier housing financing in Pakistan and

India, where mortgage-backed securitization was explored.

Risk Management

• Liquidity risk (due to term mismatch). NBFIs suffer more, commercial banks cope better. -> Mortgage refinancing company, guarantee facility, capital markets could address the issue.

• Market risk (stemming from interest rate fluctuations) is passed on to the clients by offering adjustable rate mortgages. -> interest rate guarantee mechanisms could address this issue.

• Credit risk will become important as mortgage lending increases. -> better client information, more efficient usage of credit bureaus.

• Under-developed legal framework. Weak ownership and title, dysfunctional secured transactions laws, poor professional support for the real estate industry creates. -> legal reform, enforcement strengthening, capacity building.

Low-income housing solutions• Expand market outreach through

innovation and enabling regulation.

• Affordability is stinted due to pervasive due to high interest rates, high real estate prices, high cost of building materials, few world-standard low-cost technologies, inflexible financing products, informality, and costly regulations.

Who can't afford low-cost housing?

• Low-cost market solutions exist (e.g. Monitor and NHB). The model for housing provision of both formally and informally employed low-income groups can enable mortgage funding for a significant portion of low-income segments.

Regulatory Framework for Housing and Housing Finance

• Land Administration - establishing land ownership, land registration and titling. Speed, low cost, and simplicity are fundamental to an efficient system for registering property, mortgages and transferring titles, while security of land rights is the most important pre-requisite of robust housing markets.

• Foreclosure - delays and uncertainty due to weak foreclosure increases lender costs. Dangers of foreclosure on the right to shelter can be addressed via functional rental markets.

• Credit Information - Most countries in South Asia have a credit bureau collecting borrower information (Afghanistan is a notable exception). Most of the data is not computerized, has short historical horizon, covers only larger loans, and might not collect both positive and negative information about the borrowers.

Administrative Efficiency of Land Offices and Cadastral Records

Cost of registering property (% of property value)

Number of days to register property

Time to Foreclose on Property in South Asia

Credit Bureaus in South AsiaCountry Typical Credit Information CollectedAfghanistan None – there is no credit bureau.Bangladesh The public credit registry collects data on loans over $800, excluding MFI and utilities,

retailers, and trade creditor data. The data is manual and extends only 2 years back.India The private Credit Information Bureau of India Ltd. covers over 78 million individual

borrowers (10.2% of adults) and over a million firms. Data collected is both positive and negative, without a loan or other size limit, excluding MFIs, utilities, retailers, and trade creditor data. The data is computerized and goes back several years.

Pakistan The public Credit Information Bureau collects data on both consumers (at most 12% of adults) and firms (up to 2 million by estimate), without a loan or other size limit, excluding MFIs, utilities, retailers, and trade creditor data. The data is computerized and goes back several years.Three private credit bureaus – Datacheck Ltd, News-VIS Credit Information Systems, and ICIL/ PakBizInfo – have recently opened, with narrower coverage than the public bureau.

Sri Lanka The public Credit Information Bureau covers 80 percent of all loans by value, on individuals and companies. Data collected is both positive and negative, on performing loans over SL Rs 500,000, 3-month-overdue loans over SL Rs 100,000, and 3-month-overdue credit card balances over SL Rs 5,000, excluding MFIs, utilities, retailers, and trade creditor data. The data is computerized though manual reports are used, and goes back several years.

Policy OptionsCountry-specific policy directions have been suggested in the report. Four common themes emerge across the region:• Efficient Land Administration - clear and consistent regulations, clear

oversight authority, lower fees, streamlined procedures, transparency, computerization.

• Housing and Housing Finance Information and Transparency - ready and easy-to-consult information on property prices and real estate data, housing supply and demand, construction, and various housing finance data and pricing, including credit records, is indispensible.

• Long-term Funding Availability – Secondary mortgage facilities can enhance long term lending, and can pave the way for securitization in the long term.

• Expanding Housing Finance to Low-Income Groups - product innovation will bring down lending costs, customize loans to client needs, enable better risk management. Active capacity-building efforts are required.

Thank you!

Tatiana NenovaWorld Bank