IFC, a member of the World Bank Group, India’s National Housing Bank, and the Rajasthan state government are coming together in a public-private partnership to establish a new housing finance company in the state of Rajasthan that will provide home loans to low-income households.

The anchor capital of $22 million will help establish the company, coming from IFC’s own stake and mobilization through stakeholders such as National Housing Bank, government of Rajasthan, and private sector players.

The other private sector players involved are not known.  While the exact shareholding structure is currently under discussion, the  new company will focus on providing affordable housing finance options to low- and middle-income households that have limited or no access to formal financial services.

G. S. Sandhu, Principal Secretary, Urban Development and Housing, Rajasthan state government, said,  “By partnering in instituting this new company, we now have an example of a first-of-its-kind model to harness market opportunities while making affordable housing loans available.”

More than 14% of South Asians have no home or live in inadequate housing such as urban slums and squatter settlements, according to World Bank estimates.  While the region’s housing and housing finance markets are dynamic, they are limited in their outreach, catering primarily to upper-income groups.

The low-cost housing finance venture will target people who usually are not able to get loan sanctions from commercial banks and other institutions. The demand for affordable housing in India is huge as the Planning Commission has predicted a shortfall of 25 million homes. If one takes the average cost of $10,000 per unit, this is expected to be at least a $250-billion market.

While several real estate developers have entered affordable housing segment, private equity and venture capital funds are increasingly eyeing financing companies in this segment.

"This is a segment which requires a different way of thinking compared to conventional real estate development – the mind set has to be assembly line manufacturing to ensure cost efficiencies, process management and quicker turnarounds," says Ritesh Vohra, Managing Director, Real Estate, Saffron Asset Advisors Private Limited.

IFC earlier this year invested in a unit of Dewan Housing Finance Corporation Ltd focusing on low cost housing. Granite Hill Capital Partners has also invested in Aptus Value Housing Finance India, which focuses in the same segment.

Micro Housing Finance Corporation raised Rs 25 crore in private equity funding from India Financial Inclusion Fund (IFIF) and Michael and Susan Dell Foundation in the recent past.

The space has seen interest from various players in the past. In 2009,  Tata Housing Development Co, an unlisted group firm with a turnover of Rs 100 crore, said it was planning a 1,200-unit township at Boisar on the outskirts of Mumbai, and will sell apartments at prices ranging between Rs 390,000 and Rs 670,000.

Among developers, Value and Budget Housing Corporation, the low-cost housing venture backed by Indian IT poster boy Jerry Rao raised a second round of funding of Rs 17.3 crore from India Financial Inclusion Fund (IFIF).  Some of the existing developers involved in affordable housing projects include Tata Housing, Puravankara and Shriram Land, and NYSE listed Homex- exclusively focused on this segment. Also, this year, Ramesh Ramanathan, founder of Janagrahaa, launched a low-cost venture in Bangalore  under Janaadhar Constructions, an affordable housing project promoted by Janalakshmi Social Services.

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