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Housing finance: Growth drivers? - Views on News from Equitymaster
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  • Apr 9, 2001

    Housing finance: Growth drivers?

    Housing finance industry is growing by leaps and bounds. The disbursals of the industry in the last four years increased at a compounded annual growth rate of 29.5%. A spurt in the housing activity reflects the health of the economy. The incentives provided in the budget and declining interest rates fueled the growth rate of the industry.

    The outlook for the sector seems exciting as the real estate prices are dipping making the investment very economical at the moment. Interest rates on housing loans have gone down from an average of 17-18% in 1994 to 12-13% now, thereby making the loans cheaper. Houses for the middle-income group have become more affordable in the last five years. Earlier, houses would cost an average 30 years of salary, now its down to just 8-10 years' salary. These positive factors indicate the likely spurt in demand.

    Housing shortage
    (million units) FY71 FY81 FY91 FY01E
    Rural 11.6 16.3 14.7 12.8
    Urban 3.0 7.0 8.2 6.6
    Total 14.6 23.3 22.9 19.4
    Source: NHB

    The housing finance industry has shown an outstanding growth rate during the first half of the current fiscal year. The trend is expected to continue for the full year ended March 31, 01 on the back of an increase in cement dispatches and affordability of houses. However, going forward the margins of housing finance companies could come under pressure with competition posed by banks.

    Encouraging growth rate of the industry
    Particulars FY98 FY99 FY00 1HFY01
    Growth in income 15.1% 17.0% 14.2% 21.4%
    Growth in net profits 16.6% 3.4% 17.1% 17.9%

    To de-risk the revenue profile, the industry has found new avenues, such as securitisation. The mechanism would require a pool of assets (mortgages), to be sold by the housing finance companies (HFCs) to National Housing Bank (NHB), which would act as a special purpose vehicle (SPV). NHB would sell these as pass through certificates to investors, which initially would be from pension funds, mutual funds, financial institutions, commercial banks and other trusts or institution, which require monthly fixed income. The mortgages would be for loans up to a period of 10 years, on which HFCs would earn interest from borrowers. It is expected that with the success of securitisation the circulation of funds would increase coupled with cash flows generated by these funds. Furthermore, a secondary market for mortgages would become feasible for HFCs. However, several bottlenecks relating to legality of the transaction have to be taken care of to bring about an improvement in the prospects of the industry.

    HDFC is a leader in the segment with a market share of over 60%. HDFC with its strong brand name, large distribution network and quality of services provided stands to benefit with the spurt in the demand. Housing finance account for over 75% of its revenues and retail loan contributes 50% of these. During the first nine months of the current fiscal its sanctions and disbursement have grown at the rate of 30.7% and 29.7% respectively. It has also slashed interest rates on housing loans, which would aid in maintaining the future growth rate. At the current market price of Rs 559, the stock trades at a P/E of 14 times and Price/Book value ratio of 2.8 times. The company is expected to grow at a CAGR of 20% in the next three years.



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