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 Rs. 914 billion
(upto Jun 2005) (US $ 21.02 bn)
• Loan Disbursements Rs. 759 billion
(upto Jun 2005) (US $ 17.44 bn)
• Housing Units Financed 2.6 million
• Distribution Outlets 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 4.00

3.50
25
Property Value (Rs Lac) &

3.00

Annual Income (Rs Lac)

22.0
20
2.50
Affordability

15.6
15 2.00

11.1 1.50
10
8.3
6.6
1.00
5.9 5.3
5 5.1 4.7 4.3 4.5
0.50

0 0.00
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Property Cost (Lac) Affordability Annual Income (Rs)

1 Lac = 1,00,000
Property price estimates in suburban Affordability equals property prices by annual
Mumbai income
 Effective Rates On Home Loans
2005 2002 2000

Loan amount 2,000,000 2,000,000 2,000,000

Nominal Interest Rate(%) 7.75% 10.75% 13.25%

Max deduction for interest allowed 150,000 150,000 75,000

Deduction on principal 100,000 20,000 20,000

Tenor (years) 15 15 15

Total amount paid per year 225,000 269,028 313,500

Interest component 155,000 215,000 265,000

Principal repaid 100,000 54,028 48,500

Tax amount saved 78,030 51,250 30,325

Effective interest paid on home loan 76,970 163,750 234,675

Effective interest on home loan 3.85% 8.19% 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%

0%
Germany
Malaysia
Thailand

UK
Hong Kong
India

Taiwan

USA

Denmark
Korea

Singapore
 Housing Shortage

250 25
23.4
200 21.8 20
19.8
No of Households (Million)

19.4
Usable Housing Stock &

Shortfall (Million)
150 14.6 15
13.5
100 10

50 5

0 0
1961 1971 1981 1991 2001E 2005E

Usable Housing Stock (LHS) No of Households (LHS) Shortfall (RHS)

Source : NBO,
 Increasing Urbanisation Trends
Population Projection: 2001-2025
Urban
80 72 Rural
71 70
68
Urban-Rural Population (%)

66
70 64
60

50

40 34 36
30 32
28 29
30

20

10

0
2001 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, asset-liability
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