FINANCING REAL ESTATE AND HOUSING: THE INDIAN PERSPECTIVE
Keki Mistry Managing Director, HDFC
FICCI: “Global Banking: Paradigm Shift” October 6, 2005
Background on HDFC
• First specialised mortgage company in India established in 1977
• Loan Approvals (upto Jun 2005) Rs. 914 billion (US $ 21.02 bn)
• Loan Disbursements (upto Jun 2005) • Housing Units Financed • Distribution Outlets
Rs. 759 billion (US $ 17.44 bn) 2.6 million 300
Housing Market Scenario
• Growth in demand - driven by improved affordability – Rising disposable income
– Low interest rates – Generally stable property prices – Fiscal incentives on both interest and principal repayments • Increasing urbanisation • Increased number of players
Housing shortage of 19.4 m units – 12.7 m units in rural areas – 6.7 m units in urban areas
Improved Affordability
30 25
22.0
4.00 3.50 3.00 2.50
15.6 11.1 8.3 6.6
Property Value (Rs Lac) & Affordability
20 15 10 5 0 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
Property Cost (Lac) Affordability Annual Income (Rs)
2.00 1.50 1.00
5.9 5.3 5.1 4.7 4.3 4.5
0.50 0.00
1 Lac = 1,00,000
Property price estimates in suburban Mumbai Affordability equals property prices by annual income
Annual Income (Rs Lac)
Effective Rates On Home Loans
2005 Loan amount Nominal Interest Rate(%) Max deduction for interest allowed Deduction on principal Tenor (years) Total amount paid per year 2,000,000 7.75% 150,000 100,000 15 225,000 2002 2,000,000 10.75% 150,000 20,000 15 269,028 2000 2,000,000 13.25% 75,000 20,000 15 313,500
Interest component Principal repaid Tax amount saved Effective interest paid on home loan Effective interest on home loan
155,000 100,000 78,030 76,970 3.85%
215,000 54,028 51,250 163,750 8.19%
265,000 48,500 30,325 234,675 11.73%
Mortgages as a % of GDP
70% 70%
54%
60% 49% 51%
48%
50% 37%
36% 40%
23%
30%
13% 20% 9% 3% 10%
Germany
Malaysia
Thailand
Korea
Hong Kong
India
Taiwan
USA
UK
0%
Singapore
Denmark
Housing Shortage
250
No of Households (Million)
23.4 21.8 19.4 13.5 14.6 19.8
25 20 15 10 5 0
Shortfall (Million)
Usable Housing Stock &
200 150 100 50 0 1961 1971
1981
1991 No of Households (LHS)
2001E
2005E Shortfall (RHS)
Usable Housing Stock (LHS)
Source : NBO,
Increasing Urbanisation Trends
Population Projection: 2001-2025
80
72
71
70
Urban Rural
68 66
64
Urban-Rural Population (%)
70 60 50 40
28
30 20 10 0 2001
29
30
32
34
36
2005
2010
2015
2020
2025
Year
Source: Census Population Figures
Typical Profile of a Customer
• Single largest investment in his/her life time • Typically first time borrowers • Besides finance, looks for advice on legal and technical issues • Debt adverse nature • Generally salaried class individuals • Preference for floating rate loans • Increased competition has meant more choices for the customer
The Indian Real Estate Market: Contribution to the Economy
• Second largest employment generator in the country – Construction sector provides employment to 16% of the workforce – growing at the rate of 7% p.a. – Over 55% are in the unskilled category • Estimated that for every rupee invested in construction, 78 paise is added to the GDP • Real estate is a growth engine for development of over 269 allied industries • Real estate growth gives boost to construction, steel and cement sectors
Real Estate Segmentation
– Housing
• Housing for consumers • Employee/staff housing
– Non-housing
• Offices • Manufacturing plants • Malls, Retailing, Multiplexes • Hospitals/Educational institutes • Agricultural estates • Government owned real estate
Non-Housing Real Estate Market
• Greater thrust in recent years towards intellectual capital and services • Post 1998: IT & ITES changed the face of real estate development • There is a gravitation of corporates away from main cities towards the outskirts, secondary business districts • Public private partnerships • Development of other infrastructure facilities
Non-Housing Real Estate Market
• Developers are building properties and leasing out the same to consumers • Developers also borrow by discounting lease rental receivables • Several multinational companies prefer the leasing route
Opportunities
• Growth drivers – Call centres and BPOs – Family entertainment centres • Multiplexes • Retailing • Restaurants and beverage chains – Biotech units – Pharmaceuticals (R&D centres) • Venture capital funds permitted to invest in real estate
Policy Measures Needed for Real Estate
• Tax Reforms to be implemented
– Reduce stamp duty and registration charges
• Government will collect more revenues
• Litigations would reduce as registrations increase • People will invest more into properties providing liquidity to the market
– Rationalise property taxes
Policy Measures Needed for Real Estate
• Repeal ULCRA - many states yet to do so • Tedious building approval processes • Encourage single window clearance for land development permissions
• Computerisation of land records and simplification of land transactions
• Need to establish a management information system to monitor building activity
Securitisation
• Will be an important source of funding going forward • Benefits include diversity of funding sources, improving capital allocation efficiency, assetliability management, moving assets off the balance sheet • Current Drawbacks:
– The Securities Contract Regulation Act does not recognise MBS and ABS as “securities”, hence not listed – Lack of secondary market trading – Need for market makers – Need to rationalise stamp duties
• Stronger foreclosure norms and introduction of mortgage insurance will help deepen the market
Role of Developers
• Developers need to corporatise themselves • Increase transparency in terms of financial disclosures • Need to adhere to a code of ethics • World over property developers are listed
– Increases credibility – Access to more funds
The Future
• Private capital imperative to create permanent and supportive housing solutions • Smaller housing finance institutions may need to re-orient their role as originators • Further development of the secondary mortgage market • Effective foreclosure norms will help increase risk appetite • Access to long-term pension/provident funds • Real Estate Mutual Funds • Mortgage Insurance
Thank You