Low-income housing has not taken off in India in a big way even though the space got created quite some time back. Deloitte Monitor Inclusive Markets (MIM), founded by Monitor Deloitte, a global brand of Deloitte Touche Tohmatsu Ltd, has released a report titled “State of Low-Income Housing Market” that reports on the development in this space and the road ahead. Ashish Karamchandani, executive director of Deloitte Monitor Inclusive Market and co-author of the report, talks to Mint Money about the report, the low-income housing space and the challenges faced by the stakeholders in this space. Edited excerpts:
What is the logic of State of the Low-Income Housing Report?
What we saw in the Indian housing market was that everybody was going after the top of the market and houses kept getting more expensive. We realized that there is a group of people—lower income earning, say, Rs.10,000-15,000 per month—who were getting forced into renting houses and they end up paying around 30% of their monthly income as rent. An interesting thing is that they do not complain much about cramped spaces or poor drainage, but what they say is that year after year their rent is increasing. So our observation was that if somebody could build small houses in the suburbs and if somebody can finance it, these people will buy them. In 2006, we collaborated with National Housing Bank to develop some business models and get some pilots started. In 2008 and 2009, some projects started around Ahmedabad and Mumbai. In the last three years, we have tried to develop this market by not only getting developers on board but also getting housing finance companies in and working with government on enabling policies. We did a survey nine months ago and we saw that supply has started to happen but people were not sure what was happening. So we thought if we could get some data out to show what kind of housing was going on, we can attract more people into the market and also give data to the government and World Bank to make right decisions.
What have been the key observations and impact?
We looked at 23,000 projects across eight cities which looked like low-income housing and checked if they were sub-Rs.10 lakh and at least 50 houses. In the 19-month period between June 2011 and January 2013, we found that there have been 30,000 houses which have been launched in this period across 22 cities. Now what has happened is that not only did these cities have low-income housing projects, but cities around them are also picking up the trend. Interestingly, most of these are coming up in places where there is a transport link. We are also seeing more and more local developers coming in. Out of 27 developers that we interviewed, two-thirds of them are on their second project. This means that they have obviously done well in their first projects. And most them say that though they have not made the kind of money they wanted to but they are happy with the returns and 90% are willing to do more projects. This means that the fundamental business model is working.
How has been the response of housing finance companies?
Five years ago if one was an informal sector customer earning Rs.10,000 a month, she could not get a loan from anyone. Today there are eight new housing finance companies giving loans to informal sector workers. And remember these people do not have proper documentation.
But the interest rates are stiff?
It is certainly high compared with the formal sector. But then these are companies which are having to do more work. For instance if somebody comes for a loan, the companies need to ascertain how much exactly the loan seeker is earning. So they will spend time understanding the customer asking questions such as does your father have land, how many brothers you have and such other questions. These are to make sure whether the person has access to capital in case of an emergency. They do field-based back-checks with other people in the area to make sure these facts are true. And the results are amazing. These eight companies have given loans worth at least Rs.1,000 crore in the last two years and is growing year-on-year. Interestingly, the default rate is almost zero which is phenomenal.
These companies are themselves getting debt at around 10-12% and then they have to do fieldwork which is another 1-1.5% and then some margins. So you are looking at lending rates of 13-17%. It would be fantastic if borrowers got at 11% but given the cost of finance it is not unreasonable especially when you compare it with microfinance which is giving loans at around 26%. So these housing finance companies need debt at lower cost to lend at lower cost.
What have been the biggest challenges so far?
The biggest challenge right now is that we do not have enough supply. That is really going to be the key. We are seeing 30,000 houses in last five years and demand is in millions. So we are working on how to get more stakeholders in. The government has been thinking about a bunch of solutions. For example, in Rajasthan government gives free FSI (floor space index) to projects that are geared towards low-income housing and the unused FSI can be transferred to projects in the heart of the city. So, that is a huge incentive. Ahmedabad has zoned some areas around Ring Road for low-income housing. The government is the main actor here.
What do you expect from the government?
The foremost is land which pushes up the cost substantially. Affordability for these customers is an issue and if that can be subsidized then it will be a huge boost.
May be the stamp duties for these customers can be waived. These people are anyway not buying houses, but if they do why take money off them?