Transcript Expanding Housing Finance to the Underserved in South Asia

Expanding Housing Finance to the
Underserved in South Asia
Market Review and Forward Agenda
South Asia Regional Housing Finance Conference
January 27-29 2010, New Delhi, India
Background
• More than a billion people around the globe, and over 14
percent of South Asians, live in inadequate housing
• South Asia’s housing and housing finance markets are
dynamic and grew at a very high 30% in the past five years,
but are limited in their outreach, catering to upper income
groups.
• Housing and housing finance services have the potential to
be expanded to middle- and even lower- income families.
• The challenge is that South Asia is home to about half of
the world’s poor, who require more complex housing
solutions as existing market terms are not directly
affordable to them.
Importance of Housing
• Contributes to overall economic growth, social uplift and employment.
• Deepens, broadens and stabilizes the financial sector.
• Accounts for 75-90% of household wealth in emerging market
countries.
• In South Asia, 40-50 industries are directly linked with housing
construction.
• Construction and related sectors constitute 9% percent of the labor
force worldwide.
• Housing investment accounts for 15-35% of aggregate investment.
• Housing makes 15-40% of monthly household expenditure worldwide.
• Mortgage debt constitutes about 30% of GDP worldwide, and only
3.42% in South Asia.
• Increases national savings and investment, and contributes towards
poverty reduction.
Housing Debt to GDP (percent)
South Asia
3.42
Afghanistan
0.1
Bangladesh
3
India
7
Pakistan
1
Sri Lanka
6
China
15
EU
42
Malaysia
26
Thailand
17
0
5
10
15
20
25
30
35
40
45
Growth potential of Housing Finance
• The world population is expected to reach 7.9 - 10.9 billion by 2050.
Within the next two decades, 60% of the world’s people will reside in
urban areas.
• Rapid economic growth in the South Asia region, coupled with significant
population increases and growing urbanization trends makes for a
considerable potential for housing and housing finance growth.
• Household size is shrinking, and a significant middle class will be forming
in the coming decades, mostly composed of young people who are eager
to have their own, albeit modest, home.
• The averse attitudes to debt are changing, particularly for home
ownership.
• These developments are propitious to a scaled-up outreach of housing
and housing finance markets.
• And private sector lending for housing would free scarce government
resources for other social and economic needs.
GDP growth and urbanization
20
40
36.2
16.2
35
16
29.5
30
12
25
9.1
8
6.4 6.2
6.0
24.0
20
15.1
7.1
6.8
27.1
15
6.0 6.0
10
4
5
0
0
Bangladesh
Sri Lanka
India
Pakistan
year 2007
year 2008
Afghanistan
Afghanistan Bangladesh
India
Pakistan
Sri Lanka
Estimates of the growth potential
• Difficult to make precise estimates of the growth potential of the housing
and housing finance sectors in South Asia. Some tentative projections:
– Afghanistan: $2.5 billion investment ($276 million a year financing
needs) in Kabul’s informal housing sector alone.
– Bangladesh: 3.5 million new rural houses required, and about 1.9-3
million dwellings require incremental construction and repair.
– India: US $108 billion investment up to 2012.
– Pakistan: US$5.6 billion investment for 2009 alone (US$2 billion or
1.26% of GDP financing need) for 470,000 housing units.
– Sri Lanka: up to US$8.8 billion financing needs by 2020.
Expanding access to middle /lower-income groups:
developing a sound and accessible market
The markets need balanced funding models, diversified instruments, sound
housing prudential regulations, innovative products, and affordable mortgages.
• Complicating factors
– Deficient financial systems.
– Inefficient regulatory regimes – foreclosure and land administration.
– Other: sluggish building supply; poor low income housing policies; and lack
of commercially viable housing microfinance lending.
• Promising aspects:
– Islamic finance could help access underserved market segments.
– Secondary market finance is key to long-term funding and stabilization of
mortgage markets.
– Public-private partnerships and creative cooperative solutions are
promising.
A shortage of over 38 million housing
units in the region
• There are an estimated 212.5 million homeless people in South Asia, out
of a total region population of 1.5 billion (14 percent).
• Worse urban shortages are hiding behind squatter settlements and higher
persons per room density.
0.65m
13%
35%
7.6m
Afghanistan
1m
Bangladesh
India
31%
Pakistan
Sri Lanka
11%
24.7m
18%
5m
The Glum Reality in the Slums
Country
Slums’ Statistics
Afghanistan
80 percent of the Kabul population (2.44 million) live in
slums
Bangladesh
2,100 slums; more than 2 million people in Dhaka live
either in slums or are without any proper shelter
India
52,000 slums holding 8 million urban households,
representing about 14 percent of the total urban
population.
Karachi alone has between 600-800 slums, sheltering
about 7.6 million (or 1 million households) out of the
total city population of 15.1 million people
Pakistan
Sri Lanka
A considerable share of the population of Sri Lanka lives
in plantations, slums and shanties.
Housing Supply in South Asia
• Purely government solutions at such scale are difficult a large-scale market solution is required.
• Success stories exist (e.g. India) - viable and profitable
models to serve lower-income groups.
• Developer finance and efficient land administration are
required for low-cost development to be profitable.
• Sound governance, professional standards and norms,
transparency, and good consumer protection will help
as well.
• Construction quality and construction standards are
important.
Prevalence of Temporary Housing in
South Asia
Country
Temporary Housing
Afghanistan
No data
Bangladesh
50 percent of all housing
India
45 percent of all housing
Pakistan
39 percent of all housing
Sri Lanka
20 percent of housing units have mud
floors
Real estate prices; secondary markets
Unprecedented rise in South Asian property prices impairs affordability.
• Driven by the cost of land and construction materials, rising demand,
urbanization, high economic growth, increasing remittances, limited
availability of land, speculative trade in real estate.
Country
Afghanistan
Bangladesh
India
Pakistan
Sri Lanka
•
•
•
•
Cost to construct low-income housing (per square foot)
$15 to $20
$27
$20 to $22
$9.6 to $12
increased about threefold between 1990-2005
Sluggish and in transparent secondary markets for property.
Dual pricing system due to high property costs and taxes.
Lack of secondary housing market infrastructure.
Weak foreclosure enforcement.
Growth Rates of the South Asia
Housing Finance Industry 2007-2008
45%
40%
40%
35%
30%
30%
25%
20%
20%
15%
14%
13%
Bangladesh
India
10%
5%
0%
Afghanistan
Pakistan
Sri Lanka
Housing finance markets
•
•
•
Generally dominated by the banking sector
Mortgage products : inflexible, unaffordable, geared to high-income customers
Lower-income groups mostly serviced by state-owned banks.
Country-specific features:
• Afghanistan – one of fastest growing and most limited outreach. Major laws being
currently adopted, and remaining to be implemented.
• Bangladesh – nationalized commercial banks and private and foreign commercial
banks hold 23.6 percent and 35.7 percent market share, respectively.
• India – a variety of financial institutions, including non-banking housing finance
companies, but still a concentrated market, with four financial institutions
controlling more than two thirds.
• Pakistan – the second fastest-growing and limited outreach country in the region.
• Sri Lanka – banks and state-owned specialized mortgage lenders are the sole
players in the country’s market.
Typical Mortgage Terms in South Asia
Country
Typical Mortgage Terms
Afghanistan
$10,000-$20,000, 12%, 20 year maturity
Bangladesh
$36,300-$43,600, 14-15%, 10-15 year maturity,
restrictive loan-to-cost maximums (capped at
70% generally, but averaging 50% in practice).
Interest rates mostly variable
$30,000 on average, 12%, 13 years maturity,
plain vanilla home amortizing loans, on
predominantly floating rates and with
prepayment penalties, average loan to value
ratio of 65% (maximum 85% at origination)
$21,000-$44,400 on average, 15-17%, 12.5
years maturity on average
$10,000-$40,000, 15-17%, 15-25 year maturity
on average, generally fixed rates by state-owned
banks and variable rates by private banks
India
Pakistan
Sri Lanka
Total Mortgage Balances Outstanding
and Market Shares, by country
Country
Bank Mortgage
Financing
State Specialized
Mortgage
Financing
Afghanistan
100% (a)
0%
Private
Specialized
Mortgage
Financing
0%
Islamic
Mortgage
Financing
Bangladesh
(Tk. 142.4 bn)
India
(IRs. 3,970 bn)
Pakistan
(Rs. 89.9 bn)
Sri Lanka
(Rs. 181 bn)
64%
17%
12%
7%
66% (b)
4%
30%
included in (b)
76%
13%
0%
11%
75%
25%
0%
0%
included in (a)
Housing Finance Market Players
• In addition to the dominant banking sector and state-owned housing banks,
there is a diverse team of housing finance players:
– Specialized housing finance companies (India, Bangladesh). Innovative,
serve lower-income groups, but starved of long-term, low-cost funding.
– Islamic housing finance instruments (e.g. diminishing Musharakah,
murabaha). Growing substantially, massive untapped potential, still not
focused on lower-income home financing.
– Informal housing finance - Low-income groups in South Asia, rural dwellers,
and those with irregular or informal incomes fund their homes through
savings and family / friends.
– Microfinance housing lending –for home improvement, not purchase.
Diversified products, segmented clients, handle risk better, lack funding.
– Large-scale project finance – lacking, developers fund out of equity.
• Incipient experimentation with second-tier housing financing in Pakistan and
India, where mortgage-backed securitization was explored.
Risk Management
• Liquidity risk (due to term mismatch). NBFIs suffer more, commercial
banks cope better. -> Mortgage refinancing company, guarantee facility,
capital markets could address the issue.
• Market risk (stemming from interest rate fluctuations) is passed on to the
clients by offering adjustable rate mortgages. -> interest rate guarantee
mechanisms could address this issue.
• Credit risk will become important as mortgage lending increases. ->
better client information, more efficient usage of credit bureaus.
• Under-developed legal framework. Weak ownership and title,
dysfunctional secured transactions laws, poor professional support for the
real estate industry creates. -> legal reform, enforcement strengthening,
capacity building.
Low-income housing solutions
• Expand market outreach through
innovation and enabling regulation.
Who can't afford low-cost housing?
• Affordability is stinted due to
pervasive due to high interest rates,
high real estate prices, high cost of
building materials, few worldstandard low-cost technologies,
inflexible financing products,
informality, and costly regulations.
• Low-cost market solutions exist (e.g. Monitor and NHB). The model for
housing provision of both formally and informally employed low-income
groups can enable mortgage funding for a significant portion of lowincome segments.
Regulatory Framework for Housing
and Housing Finance
• Land Administration - establishing land ownership, land registration and
titling. Speed, low cost, and simplicity are fundamental to an efficient
system for registering property, mortgages and transferring titles, while
security of land rights is the most important pre-requisite of robust
housing markets.
• Foreclosure - delays and uncertainty due to weak foreclosure increases
lender costs. Dangers of foreclosure on the right to shelter can be
addressed via functional rental markets.
• Credit Information - Most countries in South Asia have a credit bureau
collecting borrower information (Afghanistan is a notable exception). Most
of the data is not computerized, has short historical horizon, covers only
larger loans, and might not collect both positive and negative information
about the borrowers.
Administrative Efficiency of Land
Offices and Cadastral Records
Cost of registering property (% of
property value)
12
Number of days to register
property
300
10.2
10
8
7.2
6
4
2
245
250
4
4.6
4.8
5.1
5.6
7.4
200
150
105.9
83
100
50
25
5
0
0
44
50
250
Time to Foreclose on Property in
South Asia
Sri Lanka
15
56
Pakistan
58
India
60
0
20
73
127
40
60
80
Time for Notification
100
days
120
140
160
Time for Enforcement
180
200
Credit Bureaus in South Asia
Country
Typical Credit Information Collected
Afghanistan
None – there is no credit bureau.
Bangladesh
The public credit registry collects data on loans over $800, excluding MFI and
utilities, retailers, and trade creditor data. The data is manual and extends only 2
years back.
The private Credit Information Bureau of India Ltd. covers over 78 million
individual borrowers (10.2% of adults) and over a million firms. Data collected is
both positive and negative, without a loan or other size limit, excluding MFIs,
utilities, retailers, and trade creditor data. The data is computerized and goes back
several years.
The public Credit Information Bureau collects data on both consumers (at most
12% of adults) and firms (up to 2 million by estimate), without a loan or other size
limit, excluding MFIs, utilities, retailers, and trade creditor data. The data is
computerized and goes back several years.
Three private credit bureaus – Datacheck Ltd, News-VIS Credit Information
Systems, and ICIL/ PakBizInfo – have recently opened, with narrower coverage
than the public bureau.
The public Credit Information Bureau covers 80 percent of all loans by value, on
individuals and companies. Data collected is both positive and negative, on
performing loans over SL Rs 500,000, 3-month-overdue loans over SL Rs 100,000,
and 3-month-overdue credit card balances over SL Rs 5,000, excluding MFIs,
utilities, retailers, and trade creditor data. The data is computerized though manual
India
Pakistan
Sri Lanka
Policy Options
Country-specific policy directions have been suggested in the report.
Four common themes emerge across the region:
• Efficient Land Administration - clear and consistent regulations, clear
oversight authority, lower fees, streamlined procedures, transparency,
computerization.
• Housing and Housing Finance Information and Transparency - ready and
easy-to-consult information on property prices and real estate data,
housing supply and demand, construction, and various housing finance
data and pricing, including credit records, is indispensible.
• Long-term Funding Availability – Secondary mortgage facilities can
enhance long term lending, and can pave the way for securitization in the
long term.
• Expanding Housing Finance to Low-Income Groups - product innovation
will bring down lending costs, customize loans to client needs, enable
better risk management. Active capacity-building efforts are required.
Thank you!
Tatiana Nenova
World Bank