Ahmedabad Trip

Ahmedabad has an interesting city dynamic – rural in the outskirts and quite urban in the heart of the city. A lot of land available at affordable prices in the outskirts, coupled with higher FSI translates into decent margins for builders even in the low-cost to affordable housing segments. In spite of that, there are hardly any projects coming up in this segment. Like Mumbai, Ahmedabad also faces problems due to excessive migration to urban areas, so demand is not the issue. But demand for housing is more of an aspiration without purchasing power – an empirical proof to our belief at MHFC – Lack of financing is the major cause for the lack of low-cost housing in cities today.

Ahmedabad was one of the first cities Monitor had started experimenting with its social change initiative. It was quite evident that they had made a lot of progress in terms of relationships with builders as well as building a database of prospective customers.

After we landed in the morning, we saw three plots that were shortlisted by developers for starting their projects – each of roughly 2000 flats in the affordable segment (sub 5lakh category). On one of the plots, the builder was in final stages of getting approvals and had a mock apartment built already. We met a couple of prospective customers on site along with DSAs appointed by Monitor, to get a feel of the consumer psyche. Their aspirations were quite different from their counterparts in Mumbai. They wanted the 1BHK flat though it was slightly above their affordability. Their argument – this flat would be a once-in-a-lifetime investment, so they wanted something big enough for their family. When we asked why they would not go for the smaller 1RK today and wait for a couple of years till their salaries increased, they felt, 1BHK would always be a little outside their reach even then, with rising property prices. So it made sense to invest in that today, and live within means to service the higher EMIs – not something we could deny; though I feel they looked at this project as a one-off, not realizing that if this pilot did work, competition would eventually keep a check on both property prices and loan interest rates.

Overall, it was a morally satisfying trip, and I left the city feeling reinforced as far as our belief was concerned – the lack of housing in cities should have a market driven commercially sustainable solution.

TM City: Loan mela visit

A couple of months back I had been invited for the loan mela organized by TM City (http://www.tmcity.in/) They had invited everyone who had been allotted a flat (through the lottery process) and a few housing finance companies (hfc) so that the customers could explore available financing options under one roof. Though we were not ready to start operations, I wanted to talk to prospective customers and other hfc's to get a better understanding of what they thought of the project. TM City employees were very helpful and gave me a desk next to other hfc's.

I think the mela was a big success, quite a few people had come with necessary documents and were sanctioned loans on the spot. It was very useful for me - I got to meet various categories of customers. One slightly worrying factor was that a decent chunk was looking at the house in karjat as an investment - or a house in the future when their kids grow up, so not as a primary residence. Their main argument was the lack of schools and other general infrastructure. Interestingly, the long commute into the city was not bothering them as much. A few were just looking for financing only because they got selected in lottery. Some already asked about selling them onto others and get the appreciation, though there were quite a few who were genuinely willing to move to Karjat and commute to Navi Mumbai or Mumbai city. Almost everyone who got allotted the 3 lakh house were in the 10k household income range with most of the income in cash. (and other hfc's rejected them because of that - eg. wife taking tuitions at home earning 6000 a month, or private employers giving 1/2 cheque and 1/2 cash)

On the whole, I had a good q/a session with them. But my interpretation - for people this seems like a subsidised project, and think that market price of such a product will be higher - so quite a few speculative investors!

Background

A little bit about why MHFC was set up. Close to a year ago, the promoters attended a presentation made by the Social Change Division of The Monitor Group ("TMG"), a US consultancy with operations in India. This division - for more info, see http://www.mim.monitor.com/index.html - is looking at market based solutions for social problems, and the first issue they decided to focus on was / is urban housing for LIG households, esp in the informal sector. This was very interesting as it represented a different take on the problem. It suggested that the issue could start to be addressed by the market, rather than operate through subsidies. TMG was interested in the whole eco system of affordable housing - but its main focus / idea initially was on the supply side - to get builders to just build smaller and thus make the price point affordable. For eg - instead of building say 500 sq ft houses, currently the low end of the scale, which would end up costing approx Rs 6-8 lakhs in most Tier I city suburbs, TMG suggested that builders could look at constructing 250-300 sq ft flats instead. This would bring the price down to approx Rs 3-5 lakhs. The idea is still being adopted and TMG is working with several builders to impress upon them that even if margins are lower, volumes are assured and if the flats came up quickly, then the return in capital could be quite high. We felt that this was a good idea and sooner or later, builders would be attracted to the sector given the huge unmet demand. However, in our opinion, what was missing from the puzzle was making financing available to the buyers. That is, even if houses were made available, this was not a market segment that currently banks / housing finance companies were interested in - mostly because of perceived credit risk and lack of documentation (esp borrowers from the unorganised sector).

The promoters of MHFC felt otherwise as the general microfinance experience has shown an almost exemplary track record in unsecured loan repayments (over 99% in general in India). Merging this experience with a similar very low NPA record in housing finance, our instinct is that LIG families value their homes so highly that it would be a top priority to pay the mortgage - just like it is for any MIG / HIG Indian family. This of course is an untested theory and we will only know if this is true once we start giving out loans. But to cut a long story short, we set up MHFC in May 2008, and applied in June for the required license from the regulator, the National Housing Bank ("NHB"). Given the NHB and the RBI's strong focus on financial inclusion, we expect this license to be issued shortly. However, in parallel, we are setting up the back office, credit model, legal systems, etc - and we expect to start disbursing loans by April 2009. We will be developer led - that is, we will lend only on specific projects - after first confirming that units are aimed at a similar target population (price point typically less than Rs 5 lakhs) and after completing due diligence on the land titles and permissions to build. Projects are not easy to find but given the slowdown in the real estate market currently, and general emphasis on LIG segments (with new financing sops being given by the RBI), hopefully this will change.

Mumbai terror

This was supposed to be a post on the background of MHFC and why the promoters decided to start the company. But events have overtaken us and now the only issue on all our minds is the mindless Mumbai terror strikes. It would be very worrying under any circumstance, but this time it was very close to home. That night, I was at a wedding party at a restaurant a few hundred metres from the Taj. The party turned out to be a godsend for the groom and some of the invitees - they were staying at the Taj and luckily had stepped out. When the first news came in at about 10 pm, we were told that it was a gangland strike at Cafe Leopold. But as further news came in and when the groom's best friend came in with the story that he had come out of the Taj and seen bodies and furniture scattered around, we knew that this was more serious. The restaurant was closed down and we could only get out at 1 a.m (against security advice). We did not leave home for the next 3 days. The only time we stepped out, we had to rush back as we were told that strikes had again started - later turned out to be false rumours. We saw the Taj burn and heard grenade blasts / gunfire sounds for over 2 nights. It was all very tense.

For a survivor's account, see the link below:
http://www.forbes.com/opinions/2008/12/01/mumbai-terror-taj-oped-cx_mp_1201pollack.html

Link to BBC site on Mumbai attacks: http://news.bbc.co.uk/2/hi/in_depth/south_asia/2008/mumbai_attacks/default.stm