New Delhi, Oct. 29 -- Affordable housing finance companies are finding favour among large private equity firms as the strong demand for such loans and a concerted push from the government has enhanced the growth prospects of these entities. Also, reasonable valuations of many entities have helped garner interest from investors, say experts.
After a period of subdued growth between 2019-20 and 2021-22, affordable housing finance companies experienced a resurgence in growth in the financial year ended 2023, and expanded 23% y-o-y. According to Care Ratings, affordable housing finance companies are expected to clock a higher 29% growth rate in FY24 and 30% in FY25.
There have been a handful of noteworthy deals in the segment over the last 12 months. Most recently, private equity major EQT inked an agreement to acquire Indostar Home Finance for Rs 1,750 crore. The deal announcement came after EQT lost out to CVC Capital Partners in a bidding war for Aavas Financiers.
In May, Warburg Pincus struck its single largest deal in India and decided to acquire Shriram Housing Finance for Rs 4,630 crore.
"Over the period of time, the valuation bid-ask for affordable housing assets have moderated to a fair range and the current transaction multiples are well supported by expected long term market growth rates and expected returns on invested equity," Manik Mahajan, partner - strategy and transactions, EY India said.
The government defines affordable housing as a residential unit with a carpet area of 60 square metres in metros and a value below Rs 45 lakh. In non-metros, the corresponding area is 90 square metres but the value remains the same. Typically, the average ticket size in affordable housing is Rs 35 lakh. The main differentiator between the affordable and prime segments is the profile of borrowers. While the affordable housing segment caters to self-employed individuals, the large ticket housing segment caters to salaried individuals.
With the onset of COVID-19, the demand for affordable housing took a hit owing to a withdrawal of the credit linked subsidy scheme for economically weaker segment and low-income groups, rising land prices, and a preference for mid-range, premium, and luxury projects from developers, especially in metro cities.
Further, many companies reported early-stage delinquencies amid higher interest rates. On average equated monthly installments (EMI) have risen 14.4%, following the Reserve Bank of India's repo rate hikes in 2022 and 2023.
Though some of these challenges persist, bankers are confident that the segment will witness robust growth in the coming years, aided by a likely fall in lending rates and strong GDP growth. The government's budget announcement to expand the Pradhan Mantri Awas Yojana (PMAY) will also aid demand, especially in rural areas and non-metro cities.
Many players in the affordable housing finance segment have witnessed strong loan growth in the last four years. Among key names, the assets under management of Grihum Housing Finance and Aadhar Housing Finance rose 108% and 59% respectively since FY21. The total AUM of Shriram Housing Finance has risen 71% in the last 12 months alone. The gross non-performing asset (GNPA) ratio of each of these companies is hovering around 1%.
According to Care, the optimistic outlook for affordable housing finance companies is supported by several factors, including their relatively smaller base compared to traditional banking institutions and prime housing finance entities, their capacity to penetrate unorganized market segments, and their adept appraisal skills. These competencies enable AHFCs to effectively serve customers who may not meet the prime credit criteria.
"India's affordable housing sector is riding a wave of positive momentum, driven by rapid urbanisation, supportive government policies and accessible financing options. These factors are set to create a promising environment for companies specialising in affordable housing finance," Amit Sharma, managing director and chief executive officer, Satin Housing Finance said, adding that the sector will benefit from better loan growth, the expansion of spreads, and the roll out of the enhanced Pradhan Mantri Awas Yojana (PMAY) scheme.
In August, the Union Cabinet approved the PMAY Urban 2.0 scheme wherein financial assistance will be provided to 1 crore urban poor and middle-class families to construct, purchase or rent a house at an affordable cost in urban areas in five years. The government will provide Rs 2.30 trillion assistance under the scheme.
"We want to maintain our AUM growth guidance at around 21-22%. Perhaps, the AUM growth may be 1% higher on an annualised basis because of the PMAY 2.0 subsidy," Rishi Anand, managing director and chief executive officer, Aadhar Housing said.
Aadhar Housing has extended subsidy to 45% of the customer base under PMAY 1.0. But under the revised scheme, the company intends to extend the facility to up to 50% of customers on an incremental basis.
Experts feel that launch of the PMAY 2.0 will encourage more players to explore the affordable housing segment, especially when other high margin products like microfinance loans and unsecured personal loans have witnessed a build-up of asset quality stress.
Recently, Godrej Capital announced plans to foray into the segment this year. Earlier, Bajaj Housing Finance launched the 'Sambhav Home Loans' product targetted towards the underserved customer segments. PNB Housing Finance has also expressed plans to grow its affordable housing book this year.
"Let the scheme come out in play because by the time the scheme gets operationalised, we will barely be left with four or five months in the financial year. So, the real payout and impact should be seen next year," Manish Jaiswal, managing director and chief executive officer, Grihum Housing said.
Challenges persist
Notwithstanding the booming demand for homes, large developers have largely shied away from the segment due to the steep rise in land prices in recent years, as well as a lack of government incentives. Instead, these companies have opted to focus on prime and luxury housing.
According to data from real estate consultant Anarock, the share of sales in affordable housing fell to 21% in the first half of 2024 from 38% pre-COVID.
"The rising cost of raw materials, increasing land cost and outdated definition of affordable homes, especially for metros, are the major predicaments. Besides, interest stimulants that were previously extended to developers of affordable housing have expired in the last two years," Sharma said.
Additionally, some bankers fear that higher delinquencies in the microfinance segment may spill over into a section of affordable housing borrowers. Here, signs of stress may be more pronounced in the economically weaker section (EWS) households where the annual income cap is Rs 3 lakh.
Separately, the recent Reserve Bank of India (RBI) 29 April circular on the levy of interest on borrowers has also thrown a spanner in the works. The central bank has mandated that the levy of interest on loans must be made from the date of execution of loan agreement and not from the date of actual disbursement of the funds to the customer.
"The definition of disbursement itself has changed this year. To that extent, I think there will be a two-month loss of business this year. Otherwise, it is business as usual," Jaiswal said.
On the flipside, experts are quick to note that a significant share of disbursements for affordable housing companies goes towards self- construction of homes. Hence, a lack of interest from developers in this segment should not impact the demand for these loans significantly.
Unlike microfinance micro-finance loans that are typically unsecured, home loans are backed by a collateral, and this ensures better repayment behaviour and credit discipline, say experts.
"The asset quality for the affordable housing finance loans has been holding as of now. This can partly be attributed to the secured nature of these loans, backed mostly by self-occupied residential properties as compared with the unsecured nature of MFI loans," Manushree Saggar, senior vice president & sector head - financial sector ratings, ICRA.
Nevertheless, experts feel that the government should consider revising the pricing of homes within the affordable housing budget, taking into consideration city-specific market dynamics. This will provide an additional flip to the segment.
"Under PMAY 2.0, the annual household income cap for economically weaker section, low-income and middle-income groups is Rs 3 lakh, Rs 6 lakh and Rs 9 lakh respectively. These definitions were made in 2015. It is time for the government/regulators to re-look at them given the rise in income levels and property value over a period of time," Anand said, adding that loans of a higher ticket size are required to purchase a home in metro cities.
Published by HT Digital Content Services with permission from VC Circle.