Housing finance: Will the party last?

The stocks of housing finance companies (HFCs) have been a favourite with investors in the past two years. It is believed that a housing boom, actively encouraged by the government, in the lower ticket-size segment will largely be financed by these mortgage lending entities. Year-to-date, some listed HFCs have seen their share prices rise by 80 per cent or more. The price-to- book value ratios of some of these are at par or even more than some established private sector banks.

This is also perhaps not the end of the bull run. Mahesh Nandurkar, India strategist at foreign brokerage CLSA,  said they were very optimistic about the housing segment as affordability had increased. According to CLSA, the ratio of the monthly mortgage payment (or EMI) as a percentage of monthly income is at the lowest level in two decades, especially for houses costing less than Rs 40-50 lakh.

Besides, the special thrust on the affordable housing segment under the Pradhan Mantri Awas Yojana (PMAY) would mean the segment would continue to grow. PMAY provides an interest subvention of four per cent and three per cent, respectively, for home loans up to Rs 9 lakh and Rs 12 lakh. Further, an interest subvention of 6.5 per cent for a loan up to Rs 6 lakh for the economically weaker sections and lower income groups would be there till 2022. PMAY proposes to build 20 million houses for these segments in urban areas by then.

According to Nandurkar, mortgage growth should continue to happen in the range of 15-20 per cent annually over the next five to seven years.

 
CLSA’s assessment on the housing mortgage segment is shared by many, including sector veteran Deepak Parekh. In his annual address to shareholders, Parekh had high praise for the government. “This government's policies on housing are practical and implementable. With the benefit of four decades of experience in this field, I can confidently say that I have never been as optimistic about the housing sector as I am currently,” he’d said.

In an interview with Business Standard in July, DHFL chairman Kapil Wadhawan said the mortgage-to-gross domestic product ratio was extremely low. This would lead to “consistent demand from first-time home buyers”.

Ashwini Kumar Hooda, deputy managing director at Indiabulls Housing Finance, said he expects maximum growth in the Rs 20-50 lakh loan segment for years to come. “About 65 per cent of our population are below the age of 35 and typically people buy their first houses between the age of 25 and 35. Given the underpenetration of housing in our country, housing finance is poised for growth for years," said Hooda. 

However, the space is getting crowded and the market is getting fragmented. At the annual mutual fund summit organised by Business Standard, held last week, fund managers doubted if the bull run at HFCs would sustain for long and for all.

There are a little over 80 HFCs registered with the National Housing Bank (NHB). And, a number of new ones such as those floated by JM Financial, Lodha Ventures and Piramal are set to enter the market, mostly in the affordable housing space. According to Sunil Singhania, global head of equities at Reliance Capital, the sector offers lots of opportunities at the macro level and has the potential to grow at 20-25 per cent a year for the next 20 years. However, unlike banks, HFCs don’t have the retail (individual) deposit base to back long-term loans.

“There are so many new HFCs that are mushrooming that the borrower will go to an institution which offers the best rates. If a State Bank of India is offering loans at 8.25 per cent, the new HFC will not be able to compete for the same quality of the borrower at that rate,” said Singhania. Adding: “Right now, the scenario is positive, as it is a long gestation advance. But, beyond a particular price-to-book, we would be very cautious. This return on equity of 18-21 per cent in a scenario where government securities are trading at 6.5 per cent looks like a dream for them to continue for years and years.”

Hooda of Indiabulls Housing contests this. “It doesn’t matter if HFCs have mushroomed recently, the top five per cent still controls 95 per cent of the market,” Hooda said. He also said top HFCs are having a cheaper operating model than banks, focused only on home loans, and are not tied down by regulatory requirements of bonds and cash holdings with the central bank. 

“Our cost of fund could be 1.5-2 per cent higher than banks, but our cost to income is less than 13 per cent, while for banks it is 45-50 per cent. Besides, HFCs don't have SLR-CRR obligation and can be nimble-footed with their cost structure, which banks cannot,” Hooda said, adding, housing finance companies have been steadily taking away market share from banks. 

Mahesh Patil, co-chief investment officer at Birla Sun Life Mutual Fund, agreed.  He felt non-bank finance companies will find it difficult to compete with banks and so will cater to self-employed people, where they will have to individually assess the borrower’s cash flow. 

“It’s an untapped market and here you can charge a higher yield. There is enough opportunity to grow. So, you have to look at the segmentation within HFCs,” said Patil.  While welcoming more HFCs in the market, Wadhawan of DHFL cautioned that underwriting standards should not get compromised because of more players in the market. “This is something the regulators should be worried about,” he’d said. 

Meanwhile, low-cost housing projects are also on the rise.  Oberoi Realty, Lodha Group and Sunteck Realty have announced their foray into affordable housing; this was after the finance minister announced sops for this segment in the Union Budget. Developers of affordable housing such as Tata Housing, Shapoorji Pallonji Real Estate, Puravankara and others are looking at launching more of these projects.

Affordable housing has been outpacing other segments because of the government’s thrust on ‘Housing For All’, discounts on ready inventory, and improved sentiment among buyers, because of the new Real Estate (Development & Regulation) Act. The first half of 2017 has seen a resurrection here across India, with 71 per cent of launches under the Rs 50-lakh price segment, up from 52 per cent during the same period last year.