What makes Housing Finance an irresistible theme in the current market?
bongkarn thanyakij

Most indicators are suggesting that the real estate sector has bottomed out.

Residential Real Estate sales are picking up across all the major centres in India. Affordability is at its best in the past two decades. Current interest rates, below 7%, are at an all-time low. And real estate prices have remained flat over the last five years.

The government stimulus post-Covid-19 has further triggered positive sentiments. The budget is also expected to announce further measures to benefit construction activities.

Over the past five years, the government's role has been crucial to revive the sector. Affordable Housing has been the key growth driver for the industry. A Motilal Oswal report suggests that housing sales in India’s top seven cities have exceeded launches in the last four years. It has resulted in a meaningful decline in inventory overhang.

The government's interest subsidy under PMAY has benefited over 10 lakh families. The developers are also offered a 100% tax deduction on the construction of affordable housing units.. It has helped to deliver over 34 lakh units under Pradhan Mantri Awas Yojana.

The housing finance story:

The revival in real estate has put the housing finance sector in a sweet spot. It offers a strong multi-year growth opportunity. Factors like urbanization, nuclear families, and low housing penetration in rural and semi-urban markets have immensely helped the housing finance sector.

The larger (HFCs) have managed to outperform on account of strong parentage and availability of low-cost capital. Smaller players like Can Fin Homes (CANF), Aavas Financiers (AAVAS), Aadhar Housing Finance, and Repco Home Finance have also managed to create a niche for themselves.

These players are expected to continue to benefit from a pick-up in real estate volumes. There has been some consolidation in the real estate space. The share of top-10 developers in housing sales has risen to 31% from 23% over CY16-20E in the top six cities. It has also improved the ability of the sector to service its debt.

With the fear of job losses or salary cuts are fast abating, the HFCs are confident of restricting the stressed pool to less than 2-3% of loans.

Moreover, retail housing finance has demonstrated the best asset quality performance across cycles. Homebuyers have strong emotions attached to their houses. It makes them the most regular EMI payers.

Growing competition :

Over the past two years, large banks have been going aggressive in the home loans segment. These will remain a highly attractive space for banks given the history of superior repayment history from the borrowers.

The entry of banks into the segment could shrink the market for smaller HFCs. However, stronger HFCs continue to compete efficiently. Overall, the market offers huge scope to all existing players to grow despite the intense competition.

Closing comments:

Post COVID-19, valuations for HFCs corrected sharply on grounds of the following. a) decline in loan growth, b) tight liquidity, and c) deterioration in asset quality on account of job losses and stressed developers.

However, with a sharp bounce back in the economic recovery, these fears have disappeared fast. Real estate prices and interest rates are at a historical low. Based on these positives, the disbursements for larger players are picking up.

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