Low Income Housing: State of the Market

1. Low Income Housing: State of the Market Deloitte Consulting LLP April 2013

2. State of the Market – June 2013 • ACTIVITIES • Extensive ground research, effort of more than 300 man-days, in 8 large urban centers to scan for sub-10 lakh housing • In-depth discussion with more than 25 developers spread across the country • In-depth discussion with all prominent Housing Finance players in the LIH ecosystem • OUTPUT • Estimate and characteristics of sub-10 lakh supply in large urban centers • Benchmarking business practices across players • Best practice case studies from the field • Customer insights from MIM’s ‘Unintended Consequences’ and ‘Demand Aggregator’ studies will be integrated with this report Key Objectives of the SOM Report Increasing Supply • Reduce the entry barriers for new players & Insights for existing • Provide government and other stakeholders with a fact base to define and refine policy and strategy Building a Robust Industry • Share best practices from the industry; rovideexisting players with peer comparisons • Feedback from the field on challenges and what is working

3. Good Performance of HFCs : High Growth & Low NPAs Selected HFCs Serving Low-Income Customers Note: 1Outstanding Loan Portfolio as of March 2012. For Muthoot, MHFC the data is as of June 2012. An approximate figure has been used for Shubham. 2As of Dec 2011. 3 Net Interest Margin as of Q3 FY12Source: Annual Reports, Management Conversations, Monitor Analysis

4. Key InsightsHFCs are serving different Market Segments Representative Low-income Housing Finance Market Map – India, 2013 Type of Purchase(INR 2-12 Lakhs) No Housing Activity Here No Housing Activity Here Type of Developer Note: This market map indicates primary activity of select housing finance companies Source: Management Interviews, Monitor Analysis & Research

5. Key InsightsLIH Landscape Market has become deeper with an increase in the number of developers building in existing markets; LIH activity has sprung up in new cities as well, especially Indore. May 2010 (27 Projects) Jan 2013* (103 Projects) 2 3 Delhi NCR3 Delhi NCR 4 1 Jaipur Baroda Lucknow Indore Ahmedabad 2 18 6 28 5 Ahmedabad Nagpur2 Kolkata 2 Surat Nagpur 8 2 Bhubaneswar 4 25 Mumbai1 10 Mumbai Pune 2 1 Hyderabad Bangalore 2 Coimbatore 1 Chennai 1 2 Chennai Number of active projects xx Trichy 1 Cities where detailed survey was conducted * Initial results, the number here is an estimate of the number of projects which were launched post June 2011 Note: 1 Estimate for Mumbai based on initial results; 2 Nagpur includes one project from Amravati; 3 Delhi NCR includes Meerut

6. Key InsightsSample Findings from Indore Very active LIH market dominated by 1 BHK units. Industrial development activity in the southern part of the city driving supply. Small developers are also quite active in Indore 4,4741 LIH Units # of projects xx Manglia Average PSF 1,573 3 2,251 1,150 Kanadiya Rd. ChhotaBangarda Average Saleable Area and Product Mix 2 4 Bicholi Samvad Nagar BetmaRoad 6 449 sq-ft 592 sq-ft 806 sq-ft 15% 76% 9% 1 2 1 RK 1 BHK 2 BHK 6 “only LIH” projects Khandwa Rd. Rau Pithampura 22 “mixed development” projects 5 5 Note: Indore: n = 28 (projects); 1 : Supply from large developers (>50 units in a projects) only, launched post June ‘11 Source: Survey conducted by Hansa Research; Monitor Analysis

7. Key InsightsChallenges in LIH Supply • Developers claim that for large projects it often takes anywhere between 9-24 months for the combined land and project approvals, which has an impact on construction timelines, project IRRs and unit pricing • In addition, the cost of approvals can be as high Rs 50-100 psf in certain cases • Realizing the difficulty, we have seen certain developers build on gram panchayat land or adopt G+3 structures to by-pass the lengthy approval process Long & Expensive Approval Process • According to developers across cities, their construction costs have increased by 15-20% on yearly basis • LIH is a ‘low-margin’ business and such high inflation has forced several developers to book loss on their LIH projects • High inflation also makes it difficult for developers to build their business plans as there is uncertainty over the eventual project cost Rising Construction Costs Availability of Affordable Land • Availability of well-connected affordable land still remains a concern in some cities • However, in some cities, infrastructure development has opened up new areas and developers in these cities don’t see land as their biggest problem

8. Key InsightsPositive Developments There have also been some positive developments on the government side which should drive the field further forward • Rajasthan Housing Board’s efforts to provide quality housing for EWS and LIG segments in Jaipur • Gujarat government’s recently announced intention to reserve 2km area in peripheral areas of Ahmedabad for LIH • Orissa government’s recent engagement with private developers to come up with a policy for LIH that serves the needs of urban poor

9. Key InsightsChallenges and potential interventions • Customer challenges • Inadequate supply of low-income housing • Customers’ lack of awareness on affordability, payment terms, legal clearances, and rights • Customers have limited access to legal recourse • Delay in possession leading to payment of rent and EMI simultaneously • Developer challenges • Approval processes for developing projects are time consuming • Affordable land is often not well connected to transportation and/or public services • Construction finance/funding is not easily accessible • Housing finance companies’ challenges • High cost of debt • Customers • Potential interventions • Provide interest rate subsidy to low-income customers • Waive VAT, stamp duty and registration fees for low-income customers • Mandate zones for low-income housing • Provide fast approvals for projects • Build infrastructure to increase serviced land • Provide FSI of 1.6-2.2 for affordable housing • Kick start privately built low-income housing in new geographies • Increase availability of low-cost funds to housing finance companies

10. Key InsightsSome Other Aspects MIM is also studying the effectiveness of ‘Micromortgages – as a tool for financial inclusion’; we are using a theory of change framework to evaluate its effectiveness • Theory of Change for Financial Inclusion Appropriate design, easy accessibility, and competitive pricing are key product inputs Access tosuitable financial services Utilisationof financial services to sustainably meet life needs, build assets, grow incomes and manage risks Improved life situation facilitated by financial inclusion Capability and confidence in using financial services appropriately Capability is not a one-time input. Usage can be increased by providing for continuous capability improvements of the user Source: Monitor Analysis

11. Key InsightsMicromortgages as a Tool for Financial Inclusion By improving access and building capability, micromortgages have improved customers live by helping to create an asset and influencing positive financial behaviour • Theory of Change for Financial Inclusion – Micromortgages • Flexible customer assessment model that addresses accessibility issues • Increased awareness of options due to: • Prevalence of specialist HFCs • Developer tie-ups with HFCs Access tosuitable financial services Utilisationof financial services to sustainably meet life needs, build assets, grow incomes and manage risks Improved life situation facilitated by financial inclusion Capability and confidence in using financial services appropriately • Enables building of asset basethrough house ownership • Openness to formal loans reduces exposure to informal lending and its risks • Monthly EMI payments promotes financial discipline • Increased confidence in navigating formal institutions to fund major needs • Educative product information by loan agents helps build awareness • However, experience based learning through micromortgages is more effective in building long-term capability

12. State of the Market Report – JUNE 2013 ‘. • For any questions, please contact any one of us • Vikram Jain – vikramjain2@deloitte.com • Namrata Kapoor – knamrata@deloitte.com • Darsh Maheshwari – darshm@deloitte.com • Ashish Karamchandani – akaramchandani@deloitte.com • Aditya Agarwal – adiagarwal1@deloitte.com

13. Backup

14. Key InsightsSample Findings from Ahmedabad Presence of a highly evolved LIH market with supply being driven by 1 RKs; Presence of sophisticated developers who have a deep understanding of the segment. 4,7131LIH Units # of projects xx Average PSF 1,542 Nikol 1,889 1,200 4 Average Saleable Area and Product Mix Vastral 1 Juhapura 1 Hathijan 400 sq-ft 647 sq-ft 855 sq-ft Narol 50% 45% 5% 1 2 Moraiya Gam 1 RK 1 BHK 2 BHK 5 “only LIH” projects 2 Bavla 12 “mixed development” projects 5 Note: Ahmedabad: n = 17 (projects); Supply from large developers (>50 units in a projects) only, launched post June ‘11 Source: Survey conducted by Hansa; Monitor Analysis

15. Key InsightsChallenges in LIH Supply Despite the increase in LIH activity, the supply still remains a challenge and several fundamental barriers remain for this market to scale at rapid pace • Developers claim that for large projects it often takes anywhere between 9-24 months for the combined land and project approvals, which has an impact on construction timelines, project IRRs and unit pricing • In addition, the cost of approvals can be as high Rs 50-100 psf in certain cases • Realizing the difficulty, we have seen certain developers build on gram panchayat land or adopt G+3 structures to by-pass the lengthy approval process Long & Expensive Approval Process • According to developers across cities, their construction costs have inflated by 15-20% on yearly basis • LIH is a ‘low-margin’ business and such high inflation has forced several developers to book loss on their LIH projects • High inflation also makes it difficult for developers to build their business plans as there is uncertainty over the eventual project cost Rising Construction Costs Availability of Affordable Land • Availability of well-connected affordable land still remains a concern in some cities • However, in some cities, infrastructure development has opened up new areas and developers in these cities don’t see land as their biggest problem

16. Key InsightsPotential interventions • Demand interventions • Provide interest rate subsidy to low-income customers • Waive VAT, stamp duty and registration fees for low-income customers • Supply interventions • Mandate zones for low-income housing • Provide fast approvals for projects • Build infrastructure to increase serviced land • Provide FSI of 1.6-2.2 for affordable housing • Kick start privately built low-income housing in new geographies • Increase availability of low-cost funds to housing finance companies