Affordable housing projects drive real estate sector

The real estate sector in India is now largely driven by the affordable housing projects that are receiving encouraging response from the masses all across the country. Research studies corroborate that prime cities like Mumbai and Gurgaon are riding mainly on the back of affordable housing for the past several quarters. The indicators are pointing towards a more positive movement in year 2019 indeed.

AFFORDABLE HOUSING FINANCE SECTOR

The housing finance companies (HFCs) have already reported a cumulative loan sanctions in the affordable housing department, running uptoRs 1.6 lac crore, which accounts for 25% of the entire market on housing finances, for this fiscal year. HFCs who have been able to identify the market fabric, following the changes that ensued the reforms, have reported that affordable housing loans accounted for nearly half of their Assets Under Management (AUM) section. Clearly, focusing on solemnizing schemes for the affordable housing consumer demographic serves the housing finance companies, for at least this fiscal year.

Without any dalliance, firms dedicated solely to cater housing finance to the micro-market of affordable home buyers, have cropped up. The finances and loans granted by them account for 15% of the total housing finance market AUM. This percentage converts to a cool Rs23,000 crores in home loans granted by firms catering the same solely for affordable housing buyers. If the forecasts are supposed to be believed, these firms have the possibility to triple their turnover by the next three fiscal years, through to 2020.

EFFECT OF REFORMS ON AFFORDABLE HOUSING

The climate is just about right to invest in housing because the authorities seem to be in the mood to make it easier to possess a home, for just about anyone. A whopping 7 lakh housing units have seen the green light, thanks to the PradhanMantriAwasYojna (PMAY).

The Credit Linked Subsidy Scheme(CLSS)has been rehearsed as well to ensure affordability for the loaners. For instance, the reduction of the interest could be as much as 22-45% for loans of Rs.12 and 6 lacs, over a period of 20 years. This helps economically weaker sections (EWS) and lower income groups (LIG) find some leeway when aspiring for a home. Thanks to the tax reliefs offered, certain categories of housing are going to be more affordable than others, and this is exclusive for the LIG.

HOME FINANCE METRICS

Home finance metrics have quite a different function in the affordable housing category. They do not evaluate loans and EMI rates on the same, in the similar fashion that loans for regular housing is charted. The credit profile requirements for loans sanctioned to affordable home buyers or makers, is different than what is provided to traditional home buyers.

The dynamics are different for existent housing finance companies who have started provided loans to economically weaker sections for affordable housing; and companies who have come into business solely to cater to economically weaker sections. The credit profile requirement of the former category also varies by a few degrees from that of the latter.

What's more intriguing is that in the long run, the housing finance companies that cater to the lower income groups exclusively, have reported a greater yield than the firms who have been in the industry for housing finance for a longer period. The icing on the cake is that these firms have actually reported higher yield than the entire housing finance sector has gained from the micro-market of affordable housing!

IMPROVED BUSINESS MODEL

It goes without saying, that the firms which are exclusively providing housing finance aids to economically weaker sections of the community, are susceptible to erratical financial returns. Given the unsure nature of the informal salaried customers or the lower-income individuals when it comes to meeting their dues without defaulting, these firms are vulnerable to cash influx. However, given the potential of the market, most of the firms have strived to erect business model which has taken the financial volatility of the borrowers in to account.

Most of these firms which provide housing finance to customers with a volatile credit profile are financed by foreign private equities. This ensures, that even when there is a big hold-up in the returns coming through, the firms are not exactly stranded in deep waters. Also given the sheer number of borrowers that make up the affordable housing finance sector, a little bit of patience and breathing room for the borrowers helps the finance companies churn a better yield in the long run.

WAY FORWARD

While the market seems to be ready to cater to the affordable housing takers, it still remains to be ascertained whether the market is going to be beneficial for the service providers. For firms that are exclusively catering to the economically weaker credit profiles, various market scenarios like withering demands, or volatile interest returns on loans are yet to be tested out. There are plenty of contingencies available on paper to deal with such scenarios. However, the magnitude of the market demographic can hardly make up for dismal multipliers like lack of demand or impossible credit profiles.

Therefore, while the prospect of housing and housing finances start looking up for the consumers, it is still not clear whether the services that are meant to cater to these consumers, shall be able to weather the test of time. Assessing the credit line of regular customers over time allows the money lenders to assess whether the customer is worth risking a loan sanction.

If the credit line of the market demographic does not improve, these housing finance services then face the steep task of revaluating a business model that can accommodate the non-incremental nature of the borrower's finances. Sure, the fact that the market of lower income groups is a big one, helps these financing corps expand their customer base, which makes up of the returns; but if the entire market starts depicting a trend for minimal to negligible yield, then it may spell disaster for these affordable housing money lenders.

(Sunny Katyal, Director Investors Clinic. The views expressed are strictly personal)