Strong growth prospects for the affordable housing finance sector

The competitive intensity is high in the lender segment, with banks, small finance banks and NBFCs including both specialised HFC and non-specilaised NBFCs active in the segment.

The affordable housing segment may be seeing an uptick which is a good sign of consumption momentum.

This is the biggest-ticket purchase for middle income and lower income families.

The current activity is at least partly driven by a pause in interest rate hikes.

Although housing mortgages are floating rate, a lower prevailing interest rate usually has a positive impact on sentiment.

Supply across the sector (including middle income and luxury segments) is also picking up.

The competitive intensity is high in the lender segment, with banks, small finance banks and NBFCs including both specialised HFC and non-specilaised NBFCs active in the segment.

This implies customers are getting good deals in terms of loan-to-value ratios (LTV), cross-sales of unsecured products and flexible payment structures, etc., apart from interest rates and tenures.

Banks however are more focussed on Rs 25 lakh-plus mortgages while specialised NBFCs operate in smaller tickets as well.

While asset quality remains good as is traditional in the sector, there’s a lot of employee churn.

The affordable segment is very much an employee-driven model and lenders are spending more to retain employees and control attrition.

This could be a multi-year growth industry and at relatively low risk.

In the last five years, it has delivered close to 30 per cent compounded annual growth with return on assets (RoA) at better than 3.5 per cent and lower credit costs than other consumer finance segments.

Housing finance remains low penetration overall and affordable housing is quite low, due to the need to use an employee-intensive, branch-based model in semi-urban/rural pockets.

Mortgage assets under management (AUM) overall are around 11 per cent of GDP – other large emerging markets are much higher.

CRISIL Research estimates the small ticket mortgage opportunity could be Rs 22 trillion but penetration is less than 10 per cent.

Moreover, there are some lower income districts and even entire states (especially in the East and North East) which have very low penetration.

So the addressable opportunity is high, despite competition.

Among specialised affordable housing lenders, Home First Finance (HFF) has an aggressive growth stance with a target of 30 per cent growth in AUM while delivering over 15 per cent in return on equity (RoE).

Other specialised players in the low ticket affordable space include Aptus Value, Aavas Financiers etc.

Aptus has the best net interest margins (NIM) of 11 per cent plus while HFF and Aavas both have NIMs in the 7.5 per cent range.

In all three cases, credit costs are below 1 per cent highlighting the low default scenario in the sector.

Aptus also has the highest RoA and RoE. Aptus is south-focussed and rural and concentrates on self-employed customers while HFF and Aavas both have West India focus.

There’s quite a lot of policy support.

The government is looking to establish funding avenues such as the Alternative Investment Fund which includes disbursements to developers with unfinished projects to ensure timely delivery of homes to buyers.

The Pradhan Mantri Awas Yojana facilitates quicker urban and rural housing approvals.

Affordable housing has a low GST rate of 1 per cent (luxury housing has 5 per cent GST imposed).

Taken together, this is a sector which could repay the patient investor who is prepared to research the affordable housing story in depth and wait for returns.

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