BEIJINGCASABLANCA CHICAGO HONGKONGCAMBRIDGE DELHI DUBAI JOHANNESBURG A I LSANGELES MADRIDPARISLOS MUMBAI MUNICH NEW YORKMOSCOW RIYADHLONDON SAN FRANCISCO SÃO PAULO SEOUL SHANGHAI SINGAPORE TOKYO TORONTO ZURICH Low-income Housing: An attractive business opportunity June 2012 Copyright © 2011 by Monitor Company Group, L.P. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means — electronic, mechanical, photocopying, recording, or otherwise — without the permission of Monitor Company Group, L.P. This document provides an outline of a presentation and is incomplete without the accompanying oral commentary and discussion. COMPANY CONFIDENTIAL Agenda Huge demand for low-income housing in India Low-income housing is an attractive business opportunity Current low-income housing activity in India Case examples of 2 successful low-income housing developers Conducive policy is being drafted to catalyze low-income housing CAS-COD-Prez-Date-CTL Copyright©2011MonitorCompanyGroup,L.P.—Confidential 2 Monitor has worked for 5 years in catalyzing the low income housing market Developers HFCs • Ministry of Housing & Government Urban Poverty Alleviation • Interviewed over 3,000 customers over the last six years in multiple cities across Customers India • Low income customer interviews focused on understanding housing demand, formality and variability of income, typical household expenditures, etc. CAS-COD-Prez-Date-CTL Copyright©2011MonitorCompanyGroup,L.P.—Confidential 3 Over Rs. 1,000,000 Cr Opportunity The low-income housing segment (MHI of Rs 7,500 – 25,000) is estimated at 22 Million households with an estimated opportunity size of Rs. 1,100,000 Cr (USD 245 Billion) and is largely underserved Urban Income Pyramid Offering & Supply of Housing Supply of Housing Finance 1 MHI Price of unit2 > Rs 25 Lakh Various mortgage finance options (Rs) available for segment 1% Potential demand from ~2 M HHs with >80,000 (0.7MM) estimated Market Size of ~Rs 500,000 Cr Potential size of mortgage market ~ Rs Various mortgage finance options 400,000 Cr 5% available for segment 40,000–80,000 (3.4MM) Price of unit: Rs 10–25 Lakh Mortgage finance available broadly 4% 30,000–40,000 Potential demand from ~5 M HHs with Potential size of mortgage market (2.7MM) estimated Market Size of ~Rs 900,000 Cr ~Rs 675,000 Cr Mortgage finance available broadly 5% 20,000–30,000 (3.4MM) Price of House: Rs 5–10 Lakh Severely constrained supply of Potential demand from ~ 22 Mn3 HHs housing finance for informal sector 22% 10,000–20,000 (15.0MM) with estimated Market Size Finance available for MHI > Rs 12K in ~Rs 1,100,000 Cr the formal sector, limited availability below MHI of Rs 12K for formal sector 31% 5,000–10,000 and 20K for informal sector (21.1MM) Potential size of mortgage market ~ Rs 8,80,000 Cr 33% <5,000 (22.4MM) 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 ZMK-IND-RILLIH20100108vGK-010910-SS Copyright©2010MonitorCompanyGroup,L.P.—Confidential 4 Customer Perspective: Social Need and Willingness to Pay (16 Focus Groups and over 2,000 potential customers) Many lower income households live in poor conditions and are dissatisfied with their housing situation; but their searches for affordable housing have been unsuccessful Profile — Nathubhai Appalling conditions Profile — Ganesh of Slum-Dwellers Steady job as a factory Self-employed Mechanic in Mumbai worker in a textile Live in poorly Monthly HH enterprise in Ahmedabad constructed small income ~ Rs 15,000, Monthly HH income cramped houses savings up to ~Rs 13,000, savings up to Poor sanitary Rs 1800 p.m. Rs 1300–1,800 p.m. conditions - shared Lives in 150 sq. ft. toilets, bad room in slums, Rent Rs 3,100 Lives in 1 RmK in low income drainage, water Married with 2 children neighborhood, Rent Rs 2700 logging during Family size: 5 (mother, wife, 2 children) monsoons Assets – Bank Account, LIC (Rs 1.5L), Refrigerator and PC Assets – Bank Account, LIC (Rs 3L), TV Lack of facilities — Education: Both children attend Education: Both children attend private properly planned Gujarati medium schools access points, English-medium school Rent: Has seen significant & frequent Rent: Increased by 50% in past walkways, gardens, 3 years, has moved every dedicated schools increases in rent, has moved house 5 2 to 3 years etc. times in 12 years Both share a dream . “A house of their own” Can afford a 250–350 sqft. house, willing to make 20% down payment and pay 35% of monthly income as EMIs to realize their dream Source: Primary Research (n=2000), Monitor Analysis ZMK-IND-RILLIH20100108vGK-010910-SS Copyright©2010MonitorCompanyGroup,L.P.—Confidential 5 The Opportunity in LIH Low Income, not Low Quality ZMK-IND-RILLIH20100108vGK-010910-SS Copyright©2010MonitorCompanyGroup,L.P.—Confidential 6 Sample 1 BHK Unit Layout Low income housing requires innovation in design to maximize efficient use of space and minimize cost KITCHEN ZMK-IND-RILLIH20100108vGK-010910-SS Copyright©2010MonitorCompanyGroup,L.P.—Confidential 7 Agenda Huge demand for low-income housing in India Low-income housing is an attractive business opportunity Current low-income housing activity in India Case examples of 2 successful low-income housing developers Conducive policy is being drafted to catalyze low-income housing WB-NHB-111121-AK Copyright©2011MonitorCompanyGroup,L.P.—Confidential 8 Innovative Business Model for Low Income Housing The developers entering the low income housing market have different approaches than those used in the traditional real estate sector Traditional Developer Low Income Housing Developer Buy Land Buy Land Incremental Construction Sell Allgg Units Sell Units Wait for Land Value Construct Completely Appreciation Land as Asset Land as Inventory Longer life cycle Short life cycle Very high but uncertain returns High IRR 20-40% Construction is incidental Good Margins ~20% Source: Monitor Research, Monitor Analysis ZMK-IND-RILLIH20100108vGK-010910-SS Copyright©2010MonitorCompanyGroup,L.P.—Confidential 9 A 5000 Cr LIH Business With an overall revenue potential of ~Rs. 4,800 Cr in year 5, the estimated EBIDTA is at 19% and project IRR is 40% using conservative assumptions and inputs 60 55 Key Points and Assumptions 50 Number of Projects 48 A large scale player can grow exponentially Revenue (Rs. ’00 Cr) 40 initially to about 55 projects by year 5 (assuming 30 30 26 each project of 10 acre size) This can generate a year 5 revenue of about 20 15 13 Rs. 4,800 Cr 10 7 6 2 2 We made the following assumptions to remain 0 constant or at least negate each other over a 10 Year 1 Year 2 Year 3 Year 4 Year 5 year business duration – Land Cost remains at ~Rs. 400 Overall Realization of Business (Rs. Cr) Year 3 Year 5 – Construction cost remains at ~Rs. 1200 Revenue from different Sources – Selling Price remains at the average rate of ~Rs. 2000 per sq. ft Residential 1,178 4,320 Personnel and Admin cost have been Commercial 124 255 benchmarked to a couple of listed real estate Overall Realization of Business 1,302 4,774 companies with similar level of revenue Costs from different Sources Cost of Land 400 719 Construction Cost 784 2,875 Estimated IRR 20-30% Sales and Marketing 33 119 Operating costs 50 143 EBIDTA (Year 5) 19.2% Overall Cost of Business 1,063 3,856 EBITDA 239 918 Source: Monitor Analysis ZMK-IND-RILLIH20100108vGK-010910-SS Copyright©2010MonitorCompanyGroup,L.P.—Confidential 10 Agenda Huge demand for low-income housing in India Low-income housing is an attractive business opportunity Current low-income housing activity in India Case examples of 2 successful low-income housing developers Conducive policy is being drafted to catalyze low-income housing ZMK-IND-RILLIH20100108vGK-010910-SS Copyright©2010MonitorCompanyGroup,L.P.—Confidential 11 World Bank / NHB Study Supply of Formal Housing – Activity Across India Upto May 2010 Concentration of LIH activity was in Ahmedabad and Mumbai upto May 2010 Bhiwadi, Rajasthan Avalon Homes, Avalon Group Dev City, Arun Dev Builders Bawal, Haryana Ashray Homes, Surefin Builders Ahmedabad, Gujarat Om Shanti Nagar - 2, Santosh Associates Navjivan Housing, Foliage Gokul Galaxy, Galaxy Developer New Maninagar Apartments, Dharmadev Builders Umang Lambha, DBS Affordable Home Strategy Ltd. Karnavati Apartment, Shree Ram Developers Mumbai, Maharashtra Swarajya, Neptune Group Samruddhi Complex, Poddar Housing TMC, Matheran Realty Nagpur, Maharashtra Pink City and Star City, Rashmi Housing Shridhar Empire AC, Shridhar Buildcon Shubh Griha, Tata Housing Karjat Land Developers Sathya Nagar, Conglome Techno Construction Pvt. Ltd, Lok Amber, Lok Group Vaishnavi Sai Complex, Shubh Aangan Realty Bangalore, Karnataka Valram Vatika and Valram Ashish, Valram Constructions Shubha, Janaadhar VBHC Chennai, Tamil Nadu Pune, Maharashtra Atulya, Annai Builders Anandgram, Vastushodh Project Private Ltd. Large Chennai Conglomerate Shalini Lakeview, Trishul Builders Note: Projects represented are those that were selling units priced between Rs. 3 – 7 lakhs; VBHC & Large Chennai Conglomerate have since raised their prices