Stocks of most housing finance companies (HFCs) shed 16-46 per cent in the last six months, barring Dewan Housing Finance that plunged by 79 per cent.
rate cut could see some positive response from buyers, aiding both developers as well as housing financiers. The key benefit, according to analysts at SBI CAP Research from a lower GST, is the bridging of the tax differential between completed projects which do not attract GST
and under-construction projects. This is expected to improve the demand for under-construction properties. The GST rate cut is also expected to act as a trigger for fence-sitters to opt for properties both in the affordable as well as the non-affordable segment. Among the listed developers, Prestige Estates has the highest value of under-construction projects, while DLF has the lowest inventory under construction, say analysts at Motilal Oswal Securities.
While this is a positive step for consumers, the tax cut does not benefit developers, as the new tax regime does not include input tax credit as was the case earlier. Given the higher costs as input tax credit is no longer available, analysts believe developers have no option but to raise prices. However, as the competitive pressures and the need to offload inventory is high, some developers may absorb these costs affecting their profitability.
Analysts peg the impact on profitability in the 3-5 per cent range. For developers in cities such as Delhi and Mumbai, where land makes up a significant portion of the overall project cost, the hit on margins due to non-availability of input tax credit (on construction) will be lower than for developers in other cities.
Despite the hit to margins, analysts at Edelweiss Research believe any loss of margin will be partially made up for by the leg-up in volumes due to price cuts for customers. Edelweiss is bullish on the sector and has a buy rating on Sobha and Sunteck Realty.
Unlike the realty sector, the cut in GST augurs well for HFCs, with real estate demand expected to improve. According to India Ratings, HFCs account for over 40 per cent of total retail home loan portfolio in the country and around one-third (including other non-banking finance companies) of housing construction financing.
“The development is a positive move. With an expected improvement in demand for new/under-construction projects from individuals, the development should provide additional room to expand their loan portfolio,” said Prakash Agarwal, head-BFSI at India Ratings.
Moreover, broadening affordable housing’s definition would be an additional prop to financiers, say industry experts. According to the Council, a residential house or flat of carpet area of up to 90 sq. m in non-metropolitan cities/towns and 60 sq. m in metropolitan cities with value up to Rs 45 lakh both for metropolitan and non-metropolitan will qualify under the affordable segment. Earlier, it was 60 sq. m across areas and value criterion was not there, clarified an industry expert.
Companies such as Can Fin Homes, Aavas Financiers, and Gruh Finance would benefit from this, given their business focus. Even big players such as Housing Development Finance Corporation (HDFC) are focusing on the affordable housing segment.
Apart from loan portfolio, the development would also help to reduce the hangover of a likely asset quality pressure, mainly from construction/developers loan book. Given the subdued demand scenario, there is an underlying stress with respect to debt servicing ability of developers. However, an expected pick-up in demand would help increase the latter’s cash flow position. Top housing financiers such as HDFC, PNB Housing Finance, among others, have 12-13 per cent share of construction/developers financing in their respective overall loan book as of December 2018.
HDFC, LIC Housing, and Can Fin Homes are top picks among HFCs, say analysts at domestic broking houses.