By Anamitra Deb, Ashish Karamchandani and Raina Singh, Published by Monitor Inclusive Markets, July 2010, 16 pages, available at: http://www.monitor.com/Portals/0/MonitorContent/imported/MonitorUnitedStates/Articles/PDFs/Monitor_Inclusive_Markets_Building_Houses_Financing_Homes_exec_summary.pdf
In this paper, Anamitra Deb, Ashish Karamchandani and Raina Singh examine the future of housing development and finance for the low-income population of urban India, specifically Ahmedabad and Mumbai. The authors refer to a 2006-2007 Monitor Inclusive Markets study that concluded that even the cheapest houses available on the market were at best affordable for only the top 15 percent of the urban population. Using this study as a foundation, the authors describe the changes that have taken place since and make recommendations for a new business model for the low-income housing market.
The authors assert that in the last three years the low-income housing market in India has benefited from both a “macro-economic recession” in which up-market developers have down-scaled their target customer segments and from the efforts of development organizations that are introducing “market-based, alternative models of building commercially viable housing for the lower-income segments.”
Fueling this growth in supply, the authors cite successful pilot projects, the emergence of large developers with experience in high-volume business models and an emphasis on the implementation of efficient business practices. The authors suggest that innovation in low-income housing is directly proportional to increases in construction technologies and designs that incorporate environmental sustainability.
Innovation in construction may increase supply, but without capable housing finance corporations (HFCs) the increase may be ineffectual. The authors note a growing presence of HFCs that are equipped to serve lower-income segments and emphasize the importance of addressing the unique characteristics of those earning their living in the informal sector. Much like the “innovation imperative” faced by developers, HFCs must increase the effectiveness of customer risk assessment procedures.
Concerning the commercial viability of a market-based approach, the authors created an illustrative theoretical model of a HFC in urban India that uses a “hub and spoke” model, with “hub” retail branches and “spoke” kiosks located at the sites of housing unit construction. Over a ten-year time interval it was predicted that the HFC would disburse 260,000 loans of an average ticket size of INR 400,000 (USD 8,600) at annual interest rate of 14 percent. The HFC would turn a profit in three years, with a return on assets (ROA) of 2.5 percent in the fifth year and return on equity of 17 percent in the seventh year.
The authors argue that developers and HFCs both are faced with making significant changes to their business models when expanding to low-income markets. Developers must adopt a drive toward scale while incorporating efficient construction methods. HFCs must adapt to customers that rarely have proof of income or expenditures. The authors maintain that if these two types of actors can make the necessary adjustments, there is little doubt that these markets will grow.
By Matthew Fox, Research Assistant
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