DSIJ Mindshare

Affordable Housing : The Concept Which Has Brought Much Cheer Among Real Estate Players, HFCs

The Indian housing finance sector is one of the fastest growing sectors in India and comprises of banks and housing finance companies.

The recent steps taken by the government in the Centre and also various state governments, have been pushing the real estate players towards much positivism from earlier negativism. Suddenly, there is a sense of euphoria among the builders since the time government agencies started believing and talking about the affordable housing seriously. Net results-- benefit for both the small, medium real estate players and also the HFCs.

Efficient mortgage lending is a strong driver acting as a growth catalyst for both housing demand and construction of houses in India.

Housing Finance Companies (HFCs) have witnessed an increase in total outstanding loans with a CAGR of 26 per cent between financial years 2009-2010 and 2014-2015. During the same period, the growth in total loans outstanding in the industry (i.e. banks and HFCs) was 19-20 per cent.

Indian housing sector remains relatively under-penetrated compared not only to other advanced economies but also to its emerging market peers. The mortgageto- GDP ratio stood at 9 per cent for India as on March 2015. This compares awfully with the ratiosjavascript:void(0); for countries like Denmark where the mortgage-to-GDP ratio is almost 100 per cent. This ratio for the US and the UK stand at around 80 per cent.

HFCs have been successfully able to gain market share at the expense of banks, being specialised lending institutions for housing. Due to their strong origination skills, focused approach, niche marketing, customer service orientation and diverse channels of sourcing business, HFCs are able to gain market share despite banks showing healthy growth in their lending portfolios. What can work wonders for the sector is further easing of interest rates that can spur housing loan demand and drive the end-user market. Following are the key growth drivers for the sector:-


Housing demand is directly correlated with increase in household income. The housing finance sector has witnessed in the past few years an increase in movement of households into higher income categories.

The number of households with annual income less than Rs.1 lakh was approximately 53 per cent of total population in FY 2013-14, compared to approximately 63 per cent in 2008-09.

The number of households with an annual income between Rs.2 lakh and Rs.5 lakh has increased by a CAGR of 9 per cent between FY 2008-09 and FY 2013-14.


Due to ever growing urbanisation trend in India, there is a huge demand for housing in urban areas and this is exactly where the shortage is for affordable housing. India's urban population has grown over the past four decades from 109 million in 1971 to 377 million in 2011 and is expected to grow to almost 600 million by 2030.

The urban population has been increasing steadily, from approximately 28.8 per cent in 2004 to approximately 31.8 per cent in 2014. Urbanisation is expected to accelerate at a CAGR of 2.0-2.5 per cent between 2015 and 2021, compared to the overall population growth of 1.2 per cent during the similar time frame.

India's urban population has grown over the past four decades from 109 million in 1971 to 377 million in 2011 and is expected to grow to almost 600 million by 2030. This urbanisation trend is expected to create further shortages in housing market.

The Ministry of Housing and Urban Poverty Alleviation has estimated the housing shortage in urban India at 18.78 million units and increasing. The housing shortage problem is especially faced by the economically weaker sections and low income grousp of the urban population. A study highlights there is housing shortage problem even in rural India, pegging the shortage at 43.67 million units in 2012.


One of the major developments in the last five years has been the increased finance penetration in India.

Access to financial services in urban areas increased from approximately 39 per cent in the financial year 2011-12 to approximately 42.2 per cent in financial year 2014-15, while finance penetration in rural areas increased from approximately 8.2 per cent in the financial year 2011-12 to approximately 8.6 per cent in the financial year 2014-15.


With an overall improvement in operating environment for HFCs and the Indian economy mending its way post demonetisation, the credit off-take is expected to be healthy in the upcoming quarters.

HFCs have been the darling of investors for several years now. The housing finance sector has been on a growth trajectory and indeed has grown by nearly 18-19 per cent on an annualised basis over the past three years.

As on March 31, 2016, the total housing credit outstanding in India was around Rs.12.5 lakh crore as against Rs.10.5 lakh crore as on March 31, 2015. This reflects a growth of almost 19 per cent in FY16.

Demand from Tier II/III cities, disbursements of loans linked to construction and growth in small ticket affordable housing segment all pushed the housing credit growth closer to 20 per cent. Ramnath Venkateswaran, Fund Manager-Equity, LIC Mutual Fund, says,"Potential for housing demand continues to remain high in India and as per official statistics, there was a shortage of 19 mn houses in urban areas and 44 mn houses in rural areas. This coupled with the population growth and trend of nuclear family will be the drivers of housing demand. India lags in terms of mortgage penetration (currently ~10 per cent of GDP) against 18-40 per cent for its emerging market peers. Thus, the growth potential for HFCs is robust in India both from a final demand and finance penetration perspective."

While commenting on the growth for the HFCs, Ramnath Venkateshwaran says, " We estimate that the overall retail housing finance market will grow by ~14-15 per cent CAGR over the next five years from the current ~Rs.10-11 tn. HFCs account for ~40 per cent of this overall market and the remainder is on the books of commercial banks. HFCs have steadily gained ~8 per cent market share over the past decade."

Within HFCs, the large HFCs with assets over Rs.45,000 crore have grown by not more than 15 per cent, whereas the smaller HFCs have grown by nearly 36 per cent.

The smaller HFCs gained market share due to increased focus on affordable housing finance which was also the faster growing segment. The smaller HFCs that focused on self-employed borrower segment also witnessed superior growth in FY16.

Various triggers such as softening interest rates, increasing housing demand and mushrooming affordable housing schemes have been instrumental in shaping the housing finance industry growth in India recently.

Softening interest rate has indeed been one of the major factors helping HFCs grow. HFCs are the biggest beneficiaries among the finance companies as the cost of funds have been falling for these companies at a faster rate than the lending rates.


Affordable housing is the new growth engine not only for the realty developers but also for the HFCs. As per ICRA's estimates, as on March 2016, the total loan book of all the players in the affordable housing segment stood at Rs.95,700 crore, reflecting a growth of 28 per cent in FY16.

The growth for the new entrants in the affordable housing finance segment was even higher; for some HFCs, the growth in the loan portfolio was a whopping 100 per cent.

In a recent development which is indicative of the support for the affordable housing sector, the planning committee of Municipal Corporation of Greater Mumbai (MCGM) in its Development Plan of 2034 has recommended increasing the total area available for affordable housing in the city by over 80 hectares to 787.28 hectares. The Revised Draft Development Plan 2034 (RDDP 2034) had earlier provided for 707.13 hectare for affordable housing.

According to Anil Sachidanand, "The market size of the affordable housing space is enormous and provides huge growth opportunities for the housing finance companies. Number of HFCs are coming up and most of them aim to be active in affordable housing finance space. The market is big enough to have co-existence of the players. The affordable housing space itself is backed by strong catalysts, namely, a) urbanisation resulting in expansion of urban areas/agglomerations, extension of suburbs outside the metro/mini metro areas and establishment of satellite towns and Tier II/Tier III locations b) nuclearisation of families resulting in reduction of average number of people per household. Both these, coupled with increase in disposable income fuel the demand for housing.

Considering from HFC perspective purely on the retail side, this translates into the market size of more than Rs.12-15 lakh crore, which is more than the total current mortgage outstanding that has been built up over the past 40-plus years."


Housing finance market is seeing an increase in new entrants. These new entrants include HFCs promoted by existing NBFCs and new start-ups by entrepreneurs that are supported by private equity players. With small finance banks expected to enter the housing finance segment targeting affordable housing, the space can get really competitive. The profitability can remain challenged going ahead with the customer acquisition cost increasing and the lending yield lowering due to HFCs charging lower interest rates to lure new borrowers. The processing fees is also kept lower to attract new customers. HFCs are increasingly facing competition from banks as corporate lending slows down for the commercial banks. Similar growth trend is seen for commercial banks in credit off-take as with HFCs. Banks, however, have always enjoyed a relative advantage and have been able to offer finer rates compared to HFCs. Superior retail focus also gives banks a clear advantage.

Says Anand Sachidanand, MD of AHFL, "With credit off-take on the corporate side slowing down, the banks, of late have turned their attention to the retail housing finance space and with their depth of branch network and ability to scale up, the HFCs would be facing real tough competition from them. While growth of HFCs has exceeded the banks in the last five years, maintaining the same in the next few years would be a task once banks enter into the retail space and compete with HFCs.

HFCs still manage to score over banks due to the fact that they operate mono line business which gives a dedicated focus and the ability to serve the customers in a better manner. Further, specialised HFCs active in affordable housing finance space have developed their business processes, policies and guidelines in a manner to cater to the requirements of lower and middle income customers. This would give them an edge over banks. One feels that HFCs still would be able to outperform the banks and financial institutions as far as the retail side of home loans are concerned due to their sheer expertise to judge the customers, service them throughout the loan life cycle and single product focus. This holds particularly true in affordable housing finance space."


HFCs will remain in a high growth trajectory and may continue to show some superlative performance in the coming years. Select HFCs that have embraced technology and have faster processing of documentation aided by wider reach and penetration are the ones who may beat the competition. HFCs have an edge vis-à-vis banks, being specialists in the segment.

Investors while choosing HFCs for investments, however, need to also take a call on real estate markets in India. The fortunes of HFCs are linked to the real estate markets and the risks for HFCs do increase if the prices in housing markets fall.

With increasing competition, the margins can take a hit and HFCs being a capital intensive business, there will be enough headwinds for HFCs to grow beyond a point.

While choosing between different HFCs for investment purpose, it will be crucial for investors to choose those HFCs that are able to differentiate and create niche for themselves in the crowded market. The profitability is expected to remain intact for the HFCs even as the noninterest income may fall as the companies may charge less or no processing fee from the customers.

HFCs in India are well-capitalised, which supports the argument for being bullish on the sector. With money flow expected to be positive on both the fronts, i.e FPIs and DIIs, for Indian equity markets, HFCs can be expected to attract funds from money managers which will keep the HFC stocks in demand as a group.

Editorial Research Team finds four attractive stocks from the sector under consideration, worth investing your money

Dewan Housing Finance Corporation

BSE Code: 511072 | FV: 10 | CMP: 343

Dewan Housing Finance Corporation (DHFL) focuses on providing financing products to the lower and middle income segments in India, primarily in tier II and tier III cities, and towns. The company has presence in approximately 349 locations, including approximately 182 branches, over 146 service centres, around 18 cluster offices, over two disbursement hubs and a collection centre in India.

On the financial front, DHFL's revenue increased 20.93 per cent to Rs.6460 crore in 9MFY17 as compared to the same period in the previous financial year. The company's EBITDA too rose 22.26 per cent to Rs.5920 crore in 9MFY17 on a yearly basis. Its net profit also increased by 25.8 per cent to Rs.679 crore in 9MFY17 as compared to the same period in the previous financial year. On segmental revenue front, DHFL has earned 93.07 per cent from loan, 6.72 per cent from life insurance, 0.21 per cent from asset management in FY16. DHFL eyes 35 per cent growth in education loan book to Rs.1200 crore in next fiscal year. On strong financials and growth plans, we recommend investors to BUY the stock.

GIC Housing Finance

BSE Code: 511676 | FV: 10 | CMP: 309 

GIC Housing Finance's primary business is granting housing loans to individuals and to persons engaged in construction of houses or flats for residential purposes. The company has approximately 60 branches. On the financial front, GIC Housing Finance's revenue increased 14.34 per cent to Rs.735 crore in 9MFY17 as compared to the same period in the previous financial year.

The company's EBITDA too rose 12.99 per cent to Rs.658 crore in 9MFY17 on a yearly basis. Its net profit also increased by 14.09 per cent to Rs.102 crore in 9MFY17 as compared to the same period in the previous fiscal year. To mitigate some risks, GIC Housing Finance provides loans for only 60 per cent of the property value, restricting itself to retail borrowers with sound credit profile.

The focus mainly lies on smaller borrowers with average ticket size of Rs.15 lakh. On strong financials, we recommend investors to BUY the stock.

LIC Housing Finance

BSE Code: 500253 | FV: 2 | CMP: 579

On the financial front, LIC Housing Finance's revenue increased 13.05 per cent to Rs.10344 crore in 9MFY17 as compared to the same period in the previous financial year. The company's EBITDA too rose 11.52 per cent to Rs.9744 crore in 9MFY17 on a yearly basis. Its net profit also increased by 15.59 per cent to Rs.1402 crore in 9MFY17 as compared to the same period in the previous fiscal.

LIC Housing Finance is favourably placed in the lower interest rate regime with 62 per cent of its portfolio being pure floating nature, 45 per cent of the branch network being positioned in top seven cities. On robust loan mix, consistent decline in costs, expanding margins, controlled asset quality and robust earnings visibility, we recommend investors to BUY the scrip.

Repco Home Finance

BSE Code: 535322 | FV: 10 | CMP: 633

Repco Home Finance provides a range of home loan products to individual borrowers in both the salaried and non-salaried segments to suit various requirements. On the financial front, revenue of Repco Home Finance increased 20.21 per cent to Rs.771 crore in 9MFY17 as compared to the same period in the previous financial year. The company's EBITDA too rose 20.33 per cent to Rs.685 crore in 9MFY17 on a yearly basis. Its net profit also increased 22.07 per cent to Rs.132 crore in 9MFY17 as compared to the same period in the previous fiscal year. Meanwhile, the current operations of Repco Home Finance are predominately concentrated with 90 per cent of its business coming from the southern market. The management intends to gradually venture into other geographies over the next five years. On company's expansion plans, we recommend readers to BUY the scrip.


Ramesh Nair

CEO & Country Head, JLL India:

"Affordable housing is the greatest necessity of today"

On growth opportunities for affordable housing sector in India

There is increased interest in accessing the untapped market of housing finance in affordable housing. The opportunities arise from the shortage of housing and huge gap in availability and accessibility of finance in this segment. To reach the goal of ‘Housing for All by 2022', affordable housing finance will play an important role and aid supply of housing stock in the market. With this goal in mind, the government has invested in, and formulated, various funds. In order to improve the availability of credit for house purchases, the government has allocated a total of Rs.200 billion to National Housing Bank, Urban Housing Fund and Rural Housing Fund. It has also set aside a big amount for Pradhan Mantri Awas Yojana.

Owing to the high land cost in city centres as well as the suburbs, many projects are either upcoming or are proposed in affordable pockets on the outskirts of metros. Since land cost forms approximately 30-50 per cent of the total project cost, releasing more land parcels for development through publicprivate partnership needs to be looked into. This will substantially reduce the cash flow burden for developers, and thus encourage more participation by private players.

Underdeveloped and encroached land is another opportunity to create affordable housing, especially in metros such as Mumbai where there is a big dearth of such supply. The slums in Dharavi (Mumbai), for example, encroach almost 500 acres or 200 hectares of prime land in central Mumbai. One can then imagine how these land parcels can open up huge opportunities for the development of affordable housing.

On the government's focus and supportive policy initiatives for the sector

Pradhan Mantri Awas Yojana (PMAY) A new Credit Linked Subsidy Scheme (CLSS) for middleincome groups with a provision of Rs.1,000 crore in 2017-18 was announced just before the Union Budget this year. The extension of tenure of loans under the CLSS of PMAY was increased to 20 years from the existing 15 years and the allocation to PMAY was increased from Rs.15,000 crore to Rs.23,000 crore in the rural areas.

Affordable housing got a mega push in the Budget 2016-17 Affordable housing is set to get infrastructure status. Not only that, one crore houses are to be built in rural India by 2019 for the homeless and those living in ‘kaccha' houses. This will provide the segment with cheaper sources of finance including, but not restricted to, ECBs (external commercial borrowings). Re-financing of housing loans by NHBs (National Housing Banks) can give a leg up to the sector.

Affordable housing has now been redefined as having carpet area of 30 sq m and 60 sq m instead of 30 sq m and 60 sq m in saleable area. The 30 sq m will only be applicable within corporation limits of the 4 major metros. For fringe areas of these metros and all other cities, the 60 sq m carpet area rule will prevail. This will increase the number of projects falling under this key urban infrastructure prerogative.

Also, promoters of affordable housing projects will benefit from the following Budget announcements:

1.Instead of the earlier timeline of constructing a project in three years, they get a cushion of two more years and affordable housing projects can now be completed in five years.

2.The liability of joint developments to pay capital gains tax will be in a year after the property is constructed. This will be beneficial for land owners and land prices can ease, which may get passed on to home buyers.

On factors leading to growth in affordable housing in India

Housing shortage is a major concern in the country today and can be correlated with the rate of urbanisation taking place. According to the Census of India 2011, India's urban population increased to 377 million, reflecting the rise in urbanisation from 27.8 per cent to 31.2 per cent between 2001 and 2011. This rise has led to many different issues like land shortage, housing shortfall, severe pressure on available infrastructure, transportation problems and stress on basic amenities like water, sanitation and healthcare. Affordable housing is the greatest necessity of India today as cities and semi-urban areas lack the organised development approach, which has led to the growth of slums and unorganised habitation.


Aradhana Bhansali,

Partner, Dhruv Vaghasia, Associate, Rajani Associates

The main object of Real Estate (Regulation and Development) Act, 2016 ("Act") is to regulate and promote the development in an efficient and transparent manner, as also to protect the interest of the consumers by setting up speedy machinery to redress the grievances of the consumers. The Act inter-alia, attempts to plug the lacunas, of timely possession to consumers of their flats, utilization of the funds for the project by the developers, etc., prevalent in the real estate sector.

Upon a bare reading of the Act, it becomes clear that the Developer's discretion in the project is minimized and is bound by the representations made before the concerned authority while registering his project with the Regulator. The Act stipulates do's and don'ts for the Developer while constructing and developing a project. The Act imposes stringent penalties on the Developer in the event of failure to adhere to the timelines promised by him for completion of the project. Further, in case of unreasonable delays, by the Developer in completing the project, he is liable to refund monies collected from the buyers along with penalties (monetary or otherwise) as provided under the Act.

Mitesh Mahesh Pujara

Executive Director, India Home Loans

"Affordable housing will boost both home finance and real estate players"

With all the real estate and housing finance companies having received a big boost from the Finance Minister in the last Union Budget, how are you planning to exploit this opportunity?

We are already addressing the affordable housing segment and have a strong presence in this market in Gujarat. While, in Gujarat, our focus remains on major cities like Ahmedabad, Vadodara and Surat, in Maharashtra, the cities under our focus include certain pockets on the outskirts of Mumbai and also places like Dombivali, Kalyan, Bhiwandi and Jalgaon which expand further to the adjacent areas where major developments in real estate are taking place. Being a leading player in this segment, I must say we will aggressively pursue our targets through our network of DSAs across the country, mainly in the western States and directly with the developers of the affordable housing segment. Toeing the line of the central government, our contribution will remain significant in this segment in the next three to five years to begin with.

With most banks lowering lending rates, can you shed some light on the likely impact it would have on reducing India Home Loan's capital cost?

Overall, 1 - 2 % has been the impact, owing to reduction in rate of interest in the broader market. However, I must tell you here that the government initiative (CLSS) in passing on subsidy on the interest will have a significant impact on the interest cost reducing it by 4 - 6 % per annum and this is going to encourage the aspiring home-buyers as well as the players in the real estate market. We can also tell you this will strengthen business of companies like us.

Most of the financial institutions are finding their way to the housing finance sector, do you see any threat to your company because of this boom?

What are the major challenges you face in this business and how do you plan to combat them? Competition from a larger group is a threat but the market is too big and we are still a growing player and do not see this affecting us significantly. The home loan segment as you are aware has been expanding rapidly and lots of people in their thirties are buying homes. So there is adequate space for each of the players in this segment, be it the bigger ones or the smaller ones. Also, note that the expansion in the smaller segment is equally fast, rather faster than the larger segment. We have enough space to play and this will help in strengthening our topline in the next one to two years.

How will JM Financial, as an investor help the company in scaling up your existing housing finance business?

Their present infusion in equity capital and the possible future infusions as the company grows will certainly help us in consolidating our position. This is a big and significant development in our company.

Apart from housing finance, do you have any plans to diversify your business in other lending segments of finance?

We are focused only on home loans, LAP and construction finance to developers of affordable housing projects and for now we wish to stay focused on these core areas where we have expertise. Expansion or further spread, as you may say, will come at a later stage. Now is the time to make our mark more significant in the home loans segment.

Do you have any plans to expand the company's target regions other than Maharashtra and Gujarat? Do you have any plans to spread wings beyond your existing presence?

In the immediate future, we will continue to focus on these two states, Gujarat and Maharashtra only while we have already started exploring markets in various cities in Rajasthan. So while we strengthen our presence in western India, gradually at a later stage, we may opt for entering into northern Indian states, like Rajasthan.

Do you have any plans to change your capital structure? At what rate are you expecting your loan book to grow in the calendar year 2017? Can you share some insights on your financials and outlook?

As capital infusion takes place, our capital structure may undergo some changes but the present promoter group would continue to manage the affairs. We expect to grow from Rs.32 cr to about Rs.48 cr by March 2017, greater than Rs.200 cr by March 2018 and close to Rs.350 cr by March 2019.

How will the India Home Loan memorandum of understanding (MoU) with Surat Urban Development Authority (SUDA) for facilitating housing loans to borrowers in Surat help company grow?

The company will provide housing loans to borrowers under economically weaker sections for buying houses or flats under the scheme of Mukhyamantri Gruh Yojna at various locations in Surat city. The said deal will definitely help achieve the internal growth targets for the company and put us on higher growth trajectory. We are seeing more opportunities coming in the affordable housing segment as more and more emphasis is being given by various government agencies, especially in the states of Maharashtra and Gujarat. In fact, affordable housing is going to be key focus areas for companies like ours and we expect out bottomline and topline to become stronger with the help of business coming from this segment.


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