Social Impact Investing

Impact Investments:
An emerging asset class
Global Research
29 November 2010
Table 9: Household income brackets – India
Average number of people per household = 5.3
India Economic Activity Rate = 69%
Average number of earners per household = 3.7
2005 PPP
(upper bound)
A 11,923
B 9,936
C 7,949
D 5,962
E 3,974
F 1,987
Source: World Resources Institute, UN Statistics Division.
2. Select a case study and determine the income bracket of the target customer base
In choosing a case study, we focus on finding a business model that makes
products or services affordable to some segment of the BoP market. For the
housing sector, we identified a feasibility-tested business model for affordable
housing in India analyzed by Monitor Inclusive Markets. One of the projects they
analyzed builds buildings with, for example, 5% commercial space and 95%
residential space split into 1,883 flats in urban India. Including commercial space
increases rental income, partially subsidizing the residential space. Since homes
are purchased by households rather than individuals, in Table 9 we translate the
WRI per capita income brackets into per household income brackets 49 , using the
Economic Activity Rate 50 and the average number of people per household. Then
in Table 10 we consider the affordability of the residential flats to the households
in those income segments. Flats in this type of project have been priced as low as
INR 280,000 51 ($6,000), which translates into a required annual household
income of $3,211 52 (2005 PPP). As such, the flats in this price range are
affordable by all but the bottom income segment of our population, so we include
income brackets A through E in our estimation.
Table 10: Affordability testing
Case study: Building Houses, Financing Homes, Monitor Inclusive Markets, July 2010
Line Data type Unit Min Max Calculations Notes
1 Price Rs 280,000 1,000,000
2 Pricing date 2010 2010
3 Avg inflation rate 10% 10% From 2005 — pricing date
4 Price 2005 Rs 171,236 611,558 Line 1/[(1+line 3)^(line 2 – 2005)]
5 Annual interest @ 12% 2005 Rs 20,548 73,387 Line 4 × 12%
6 Annual income required 2005 Rs 51,371 183,467 Line 5 / 40% Assume max payment/income ratio = 40%
7 Annual income required 2005 PPP 3,211 11,467 Line 6 / 16 2005 conversion rate: 16 Rs per int'l dollar
8 Price Current USD 6,000 22,000 Line 1 / 46.5 2010 conversion rate: 46.5 Rs per USD
Source: J.P. Morgan. Minimum price from Monitor Group, referencing Foliage developers.
3. Cut off the top: We are sizing only the BoP market
Since we are focused on only the BoP segment of the population, we consider the
case study pricing that will be affordable to our target population. As such, we
limit our pricing estimates (Line 1 in Table 10) to the maximum amount
affordable by the top of our population bracket. Working backward through our
Affordability Test, we calculate the maximum price affordable by households in
this population – INR 1,000,000. At current exchange rates, our price range is
then $6,000 – $22,000.
4. Limit to urban or rural population, if applicable
As the housing case study is one that applies only to urban customers where
apartment blocks are more suitable, we restrict our target customer base
accordingly. Some sectors will better address rural populations while others will
successfully cater to both rural and urban populations. The restriction to urban or
rural will be applied only where needed. In India, the average percentage of our
46
49 We translate the per capita income brackets into per household income brackets by
multiplying the income by the number of earners per household as implied by the UN
Statistics Division’s Economic Activity Rate – 69% in the case of India.
50 As defined by the UN Statistics Division, Economic Activity Rate refers to the percentage
of the population aged 15 and over which is economically active.
51 Building Houses, Financing Homes, Monitor Inclusive Markets, July 2010.
52 In the table, we assume a maximum payment/income ratio of 40% as per Monitor’s
guidance.