Micro Housing Finance Corporation (MHFC): Putting Together Developers, Buyers and Financing for Affordable Housing

My meeting with Micro Housing Finance Corporation (MHFC), one of Monitor Inclusive Market’s partners, focused on their successful business model for getting low cost and affordable housing built and homebuyers financed. MHFC is a young and growing housing finance company; one of their model innovations allows them to aggregate borrowers, and therefore originate loans at greater scale, by working with developers. Names and I talked at some length about the MHFC business model and what it means for inclusive, sustainable cities.

In explaining SCA, we first talked about our concern about India’s rapidly sprawling cities, of which Mumbai is a great example, and how affordable housing fits into livelihoods and sustainability. MHFC feels their target audience are (1) often already living close by the new developments they buy into, so not necessarily moving further out; (2) willing to move further out in exchange for a new home; or (3) may be 1st generation migrants who don’t want to move themselves because they live near work but may buy a home for their children or for their retirement.

Not surprisingly, the cost of land is the major location driver, so moving outwards is inevitable given supply and demand for prime urban locations. Still, clients most often request projects with some kind of transportation access and social infrastructure (especially schools). There is also increasing demand for connectivity. MHFC felt that new extensions of the Mumbai commuter rail was making it easier to live further out and narrow the commute to 1.5-2 hours, which is still not a great but comparable to longer commutes in cities like New York.

After the land cost constraint, the lack of government incentives for affordable housing has been the next restriction dampening supply. Without a systemic effort, small developers with the capacity to develop projects properly have no financing. MHFC has the opportunity to step in here and partner with developers.

Developers have often been the most difficult part of this chain. Banks, even the development banks, don’t want to take construction risk, fraud runs high, and inexperience or low quality opportunism are rife. To help develop their partners, MHFC also provides advisory to create the business model and the design of the units. For instance, MHFC is working with a developer in Kolkata all the way to customizing the design components to local market tastes.

Services are an integral part of the model here. Slum dwellers may be accustomed to illegal or shared utility connections, which can be both expensive and unreliable. To formalize these services, developers include Rs 40,000 in society charges. The question over the medium-to-long term, as in many low cost and affordable developments, is whether the inhabitants of these developments can invest in their upkeep. In many cases with slum redevelopment, the going-in assumption is that most cannot.

Financing. As mentioned earlier, MHFC facilitates its financing of homebuyers by working directly with developers to originate large numbers of small mortgages (hundreds at a time) associated with specific developments. Selecting the developer carefully and working closely with them lowers their risk, as do the lower capital costs on low-rise (G+3 or 4) developments (i.e. smaller individual loans). Still, the fact that their pools depend on new construction projects may raise their risk to specific projects.

Most importantly for MHFC’s risk, borrowers carry all the construction risk, and developers get free financing from the borrower because demand is so overwhelming that homebuyers have no choice but to pay money down ahead of time. Without a certain percentage of the project presold, developers won’t start building because, even if they have equity, getting the cash up front also lowers their risk.

Even so, it’s unfortunately common for developers to come back and say that they’ve run out of money and can’t complete the project and ask for more money. Developers are completely in control of the process. Clearly, then, MHFC’s close relationship with developers is key to the business.

Example: Average loan = Rs 500,000–600,000 = USD 12,000 – 15,000; down payment = 20% (often higher)

It’s in MHFC’s interest to make risks more symmetric in these projects and lessen the burden on their client borrowers. MHFC’s work to build capacity among developers is helpful to that end. Working with developers to make them more credible increases their chance of getting project finance from banks, with MHFC borrowers as their take-out at construction as opposed to having borrowers (and MHFC) take the financing and monitoring risk. If MHFC succeeds in this effort, it could easily be a LT competitive advantage for the company.

Much like microfinance, default rates are very low in this market. Insurance is too expensive to attach to loans at 4% of the loan amount. MHFC’s experience, and others, shows that insurance isn’t necessary. The house is the largest investment that most families make, and the mortgage a key part of that. Family members will often come in to pay if any problem with capacity to pay.

Sustainability. MHFC ensure that the environmental parameters of their projects suit the site and purpose, including water management, flood levels, sanitation, borewells (for free water) and power. Worth noting, MHFC observe that the inhabitants of these developments don’t use much power, so the electrical systems get little use and can be more basic.

Take-aways. This encouraging conversation with MHFC certainly underlines our conviction that capable developers exist, but that they need to be identified (and identify themselves!). Capacity building among developers is absolutely necessary to respond to the almost limitless demand of the low cost and affordable housing market. Also, we feel it would be worthwhile to explore zero or low cost green building elements like natural ventilation, daylighting, water management and building envelope insulation, as well as integrating social elements, like jobs, schools, and health care facilities.

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