Strong growth opportunities ahead for housing finance companies
In country like India with the population of ~130 crore, problem of housing shortage is severe. Without good housing, people cannot realize their full potential and remain incompetent to achieve their carrier objective. Good housing is not only pre-requisite for human development and welfare but also provides security, amenities, and privacy to the human beings for decent living. Thus for the government, housing development is positive for social as well as economic prospect as a small initiative in housing will drive multiplier effect in the economy through the generation of employment and demand. India’s mortgage-to-GDP ratio hovers ~12% which is far below when compared to othercountries like China with ~20%, USA with ~65% and UK with 88%. Though the housing finance is not a new concept in Indian financial sector, it has developed significantly over the last decade because of the enthusiastic interest of Govt to solve the housing problem of the country. Housing finance loans (HFL) grew at CAGR of 19% over the last few fiscals and Housing Finance Companies (HFCs) are adequately leveraging this growth opportunity. There are around 40 mn houses of shortage in the country and therebythe government has planned to fill this gap with new initiative “Housing for All” which would likely to remain one of of the most straightforward growth stories in India. Even if the private sector capex revival takes some more time, there will be acceleration in economic activity in India in the coming 18 months driven by housing. With affordable housing initiative along with legislations like Real Estate (Regulation and Development) Act, 2016, (RERA) and Goods and Services Tax (GST) and measure like demonetization, Indian real estate sector has seen a resurgence of interest from not only developers but also from big institutional investors. Affordable housing has garnered a lot of interest and the overall growth and earnings potential remains high for HFCs going forward. The demand for housing in urban areas has increased considerably over the past decade due to following reasons 1) increase in population 2) migration of population towards cities 3) increase in income level 4) rise in job opportunities in services sector 5) increase in nuclear families and 6) government favorable initiatives and easyavailability of institutional finance.
Top HFCs dominating the sector: In domestic housing finance sector, there are over 30 players out of which around 10 are recognized players in terms of their size. Despite the high concentration, 5 players account for ~85% of the total housing finance credit by HFCs in India. Company wise, Housing Development Finance Corporation Ltd. (HDFC) is the major player of the industry accounting for around 40% of the HFC’s credit in FY17 followed by LIC Housing Finance with share at 19%, India Bulls Finance at ~11%, DHFL at 10% and PNB Housing Finance at 5%.
HFCs’ credit likely to increase by ~22% during FY17-FY22E: On the back of strong growth drivers as well as increased emphasis of government, housing finance is likely to remain the best performing sector going forward. HFCs are likely to remain major beneficiaries of this strong growth and their credit is likely to increase by 22% during FY17-FY22 and their share in the total housing credit to increase to 44% by 2022 from 39% in FY17. Top HFCs are well managed entities and are expected to leverage the growth opportunities adequately which would boost their operational and financial performance. HFCs operate in the niche segment of finance, thus making them more efficient for home loan customers dealing and loan processing system compared to bank which treat number of segments like corporate finance and other retail loans.
Our stock recommendations: On the basis of our investment approach ‘fundamental strong stock available at reasonable valuation’ we like HFCs such as GIC Housing Finance, DHFL, India Bulls Housing and LIC Housing Finance for investment for the medium to long term period.
Housing Finance Sector:
India with a vast population and major portion living in substandard conditions, housing finance sector plays an important part for improving the living condition of the people through provding easy finance for the development of basic infrastructure like sanitation and affordable housing projects. Thereby, housing finance industry is recognized as a sector having an important impact on the country’s development, civic life and human capital formation. In spite of strong growth in disbursal of housing loans in the country, the sector has remained relatively under penetrated compared to peers which is evident from the low mortgage-toGDP ratio to ~12% v/s ~20% of China and ~65% of USA. Housing finance has been remained one of the fastest growing sector reflecting from the fact that housing loans in India grew at a CAGR of 20% over the past five years.
Despite having a specific players focusing on home loans, housing credit is mainly catered by the banks in the country which accounts for around 60% of housing loans. May be this was due to the strong branches network of banks across country as well as perceived images of credible lenders among people. Whatever, this represents a strong growth opportunities for housing finance companies and they are also adequately leveraging these drivers reflecting from high double digit growth in credit. Share of banks in housing loans segment reduced to ~60% by FY17 v/s 70% in FY11 indicating 10% reduction of banks’ share. Further, weak financial position of certain public sector banks is the added advantage for the housing finance companies for the coming future.
Participants in housing finance market include banks, state level apex co-operative housing finances societies and specified lending institutions for housing such as companies known as housing finance companies. HFCs are garnering share rapidly from all other participants in the housing finance market.
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