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Get Used To This Gold Rush
Lower rates and increasing affordability are driving a new class of lenders into the lucrative housing finance business
Photo Credit : Shutterstock
The housing finance industry is in the midst of a gold rush as financial service titans are gunning for a slice of the rapidly-growing, lucrative mortgage-finance pie. If recent applications with The National Housing Bank (NHB) are any indication, then housing finance is slated to be the next big thing. Even top names such as the Piramal Group and JM Financial have applied for housing-finance licences. Just a few years ago there were only around 40 housing-finance companies registered with the NHB. In the last four years, however, the count has more than doubled to top 85 — and that figure continues to rise. A further seven applications are pending with the NHB including one from the Hero Group, the motorcycle company. Soon there will be more than a 100 companies in housing finance, thanks to the government’s ‘Housing for all by 2022.’
Covering All Bases
The newcomers in the sector are not just looking at the mid- or luxury segment. Financing affordable housing is one segment on the cusp of big growth, which along with other segments such as mid- and luxury housing, has made the housing finance boom here to stay.
A recent CLSA report states that housing sales could rise from Rs 7 trillion to Rs 17 trillion by FY 2024, driven by market growth, and the government’s initiatives on affordable housing. The report further estimates that if just 70 per cent of this housing boom is financed, the housing-finance industry could triple to Rs 11 trillion in the next seven years. Demand is rising in tier-2 and tier-3 cities. Smaller towns are also on the cusp of new growth as realtors are now increasingly looking at affordable housing projects. It is also thanks to the increasing number of nuclear families and the ever-increasing access of housing finance, this segment is now carving its own space in the lucrative financing industry.
Several workers in the informal sector (unregulated) and entrepreneurs are now reaping the benefit of housing credit, hitherto a segment that did not receive the attention due to lack of information, and poor credit profiles, and little or no income documentation. “More operators in housing finance means that more individuals will be educated on the upside of housing finance. It will give a big fillip to the sector in the long run,” says Harshil Mehta, CEO, Dewan Housing Finance (DHFL).
Still, penetration of housing finance in the country is one of the lowest in the world — currently at just about 9 per cent of GDP against 68 and 75 per cent of GDP in countries such as the US and the UK. Closer to Indian borders, China has a mortgage-finance penetration of 18 per cent, twice that of India’s.
Of course, more financiers are ready because the business of housing finance has its charms — and stable profits. First, NPAs are low: for most of the big operators it is below 1 per cent. Second, financing is fully backed by strong collateral, that is, property; hence, people will not default. Third, mortgage rates are low, around 8-14 per cent; hence, people are more willing to finance newer houses. Last, housing finance tends to break even with sufficient volume growth and low costs within three years, driving more new business.
Access To All
Aspire Home Finance (AHFCL), the housing finance arm of MotilalOswal, entered the segment four years ago, and has already made a net profit of about Rs 50 crore. The firm disbursed Rs 4,183 crore in housing loans till FY17 of below Rs 25 lakh each, and has set a target to achieve a mortgage book of nearly Rs 7,000 crore in FY18. “There is need for housing at the lower end of the pie, so we have consciously kept the limit of Rs 25 lakh on the loan-ticket size,” says Anil Sachidanand, MD & CEO, AHFCL. “We are looking to fund the dreams of first-time, home-loan borrowers. So, if you want a second housing loan, you will not get it from us.”
A majority of AHFCL’s customers include unskilled, semi-skilled and self-employed workers, benefitting from the government’s introduction of subsidies. This subvention is given as an upfront subsidy, reducing the value of the loan in the hands of the borrowers, and thus increasing its affordability.
However, risks are part of every industry. “Like any other loan product, here too there is credit and market risk. But the risk is lower as compared to other non-collateralised loan segments, and the government’s subvention scheme is providing the helping hand for small borrowers, increasing affordability and further lowering risk here,” says Sachidanand.
Under the credit-linked subsidy scheme, known as the Pradhan Mantri Awaas Yojna, home loan borrowers receive an interest subsidy of approximately Rs 2.2 lakh each. This means that the EMIs payable would be much lower as the outstanding loan is reduced by the subsidy amount. This improves the loan-to-value ratio. For example, for a Rs 10 lakh house, the loan amount after the subvention could be at Rs 6.5 lakh; earlier, it would have been Rs 8.5 lakh. This reduces the EMI of the borrower. So, any individual with a lower income can afford a mortgage loan. The affordability is nearing the best in a decade at about 35 per cent of post-tax income, reports CLSA.
Amit Magia, MD & CEO, Khush Housing Finance, a recent entrant in the segment, points out that, due to this upfront subsidy, risks are mitigated and people with lack of documentation also receive loans. “In a little over a year of starting our operations in January 2016, we have disbursed Rs 100 crore in loans, averaging Rs 10 lakh each. We aim to disburse loans of Rs 250 crore in the coming year.”
Further, the affordable-housing segment is set to mushroom in coming years, and fresh inventory of houses is expected to be added in the next 18 months as builders too begin to target this mushrooming segment.
Despite creating additional demand, capital is not a constraint for the sector. Flush with funds, banks are increasingly lending to the sector. The new comers into the housing finance segment too are able to raise capital at inexpensive rates, making it easier to provide loans at lower costs.
Debt funds can now invest in housing finance companies (HFC) to the extent of 40 per cent of assets as opposed to 35 per cent. Infra status has been extended to affordable housing, while foreign funds is also being tapped by HFCs via the issuance of masala bonds. Besides, domestic banks are also opening their purse strings to this sector.
With little focus on the costs, HFCs are also able to operate at lucrative net margins of around 3-4 per cent, while in the affordable housing segment it could be even higher. New comers in the housing finance business with a tight focus on costs can break even in the business in 3-4 years. Hence, with very little NPAs and growth expected to remain in the range of 17-20 per cent in disbursements, it is no surprise that housing finance stocks are booming.
Since the beginning of the year, stocks such as CanFin Homes, GIC Housing Finance, IndiaBulls Housing Finance, LIC Housing Finance and HDFC have surged anywhere between 40 and 100 per cent. CanFin homes surged 282 per cent in the past one year. Ditto for GIC Housing Finance, which zoomed 208 per cent in the same period. Housing finance major, HDFC has seen its stock price increase 32 per cent in the same period.
India’s housing finance roots go back to more than four decades with the setting up of HDFC back in 1977. Yet even after four decades of rock-solid growth, the housing finance sector still seems like a sunrise industry. The gold rush in housing finance has many years to run.