HOUSING FINANCE MARKET IN INDIA

KEY FINDINGS

• The real estate industry in India struggled through the last decade. The HFC’s faced liquidity and other challenges post IL&FS crisis.
• Again, Covid19 hit, weakened the performance of the banks. All leading HFC’s witnessed a decline in their key performance ratios.
• However, the HFC’s now are in better position as the reduction in stamp duties in few states boosted overall demand and reduced cost.
• In 2021, Delhi govt’s step to cut circle rate for all properties would significantly reduce the cost of buying property for home buyers in the national capital.
• COVID19 also made people serious about their home investment plans. More potential home owners would switch to the periphery areas for larger homes and a healthier lifestyle at more competitive rates with a work-from-home viable alternative.

INTRODUCTION

Although the stress caused by the Coronavirus pandemic has affected key residential markets in India, but the average rate of new projects remains at its previous level. Housing market is being boosted by the actions of state governments. For example, on 5 February 2021, the Delhi Government announced a 20% reduction in the circle rate for all types of properties. This temporary reduction, which will remain effective until 30 September 2021, would significantly reduce the cost of buying property for home buyers in the national capital.

The Covid19 made people rethink about their home buying and investments plans. The concept is to invest in a home, either to live or to leverage it as an asset that could generate an extra source of income, mainly to be used in a crisis period. Millennials are more comfortable to home loans, while banks launching digital technology to disburse loans faster.

In 2020, RBI cut the repo rates, that led home loan interest to a record-low 7 percent. In order to make homebuying more lucrative, many banks have come forward to reduce interest on home-loans. RBI also has rationalized the risk weights and link them to loan-to-value (LTV) ratios for all new home loans sanctioned up to March 31, 2022. This would make home-buying attractive for both borrowers as well as lenders.

HOUSING FINANCEMARKET DYNAMICS

In the quarter ended December 2019, home loans, which represent almost 50 percent of the total consumer credit portfolio, saw a slower growth of 10 percent in outstanding balances compared to 20.3 percent in the same period last year, despite a series of rate cuts by the RBI, reflecting the overall slowdown in the economy. Affordable housing segment, defined as loan size up to Rs 25 lakh million, saw the lowest growth of 4.1 per cent in Q3 2019. The industry was struggling with liquidity challenges post IL&FS crisis in 2018.

As Covid19 hits the economy The Reserve Bank of India (RBI) issued guidelines on moratoriums on 27 March 2020. This gained wide publicity. The Repo rate was slashed to two-decade lowest at 4.4 percent, reverse repo rate was slashed to 3.75 percent, CRR was reduced to three percent, and Targeted Long Term Repo Operations, i.e., TLTRO 1.0 and 2.0 were also introduced.

In 2020, HFC’s witnessed weakened key performance parameters – liquidity, solvency, asset quality, earnings.

Currently, the HFC’s are facing asset quality challenges. Delays in completion of housing projects, cost overruns due to the unavailability of labour, and delayed investments by buyers in the affordable housing sector affecting the market.

Prior to the mortgage lender's projected merger with HDFC Bank, Housing Development Finance Corporation (HDFC) is expected to raise $750 million in what will likely be its final fundraising through an external commercial route.

 The money raised will be used as financing for purchasers of modest housing. The five-year loan line is being syndicated by a number of banks, including Standard Chartered Bank, MUFG, and Mizuho Bank. Later, the range of foreign banks can grow. Instead of saturating the local market, the borrower would prefer to reach out to foreign markets.

The loan's pricing may be determined by adding 110-120 basis points to the term SOFR (Secured Overnight Financing Rate), a measure of the world's interest rates that now yields about 2.63 percent.

 According to the current cost of currency risk covers in the futures market, the borrower may have to pay an additional 400-450 basis points if it hedges the entire amount of money. 0.01 percent is one basis point. Individual banks and HDFC declined to comment on the situation. 

The home lender's investor presentation states that as of March 31, FY22, HDFC had borrowings of $65.83 billion.

40 percent of it is raised through local bonds, with only approximately 3 percent coming from external commercial borrowing (ECB). 

The remaining portion is split between term loans from banks (25%) and a bigger portion of public deposits (32%). 

Both the high-end and low-end segments of the housing market saw ongoing robust demand.

 The management predicts that India's housing loan industry would grow by twofold to $600 billion over the next five years, with an anticipated 13 percent GDP penetration rate for mortgages—still lower than in other growing economies.

It thinks that being housed within a banking system is the best way to scale up home finance.

HOUSING FINANCEMARKET SIZE AND FORECAST

The housing finance market in India is estimated at XX Crores INR or $XX Billion in 2021 growing at --% CAGR till 2026

COVID IMPACT ON HOUSING FINANCE MARKET IN INDIA

The real estate sector is one of the largest contributors to the GDP, but this is one sector that has gone through more than its fair share of difficulties over the last decade.

On August 2020, Maharashtra Government announced a cut stamp duty rates from 5 per cent to 2 per cent in urban areas and in rural areas, the rates have been cut from 4 per cent to 1 per cent till December 31 and 3 per cent till March 31, 2021. The demand increases for low- and mid-income housing.

Karnataka also reduced stamp duty recently; it is reduced from five per cent to two per cent for land costing up to Rs 20 lakh for setting up industries, and cut from five per cent to three per cent on properties costing above Rs 21 lakh.

After the success of Maharashtra, the central govt also urged the other state govts to reduce stamp duty on registration of properties as it will help reduce the overall real estate cost and boost housing sales.

According to some reports, reducing stamp duty alone will not make the real estate market stable, cutting GST for at least for some period would have make more sense. 

After the lock-down, more potential home owners would switch to the periphery areas for larger homes and a healthier lifestyle at more competitive rates with a work-from-home viable alternative. One of the most influential recent residential real estate developments of the COVID-19 era is the new-found preference for owning rather than renting houses.

According to the World Bank Global Economic Prospects estimates, India’s economy will contract by 9.6% in FY 2021, amid a drastic decline in household spending and private investment. Growth is expected to recover to 5.4% in 2021. The International Monetary Fund has also projected India’s economy to contract by 10.3% in FY 2021, forecasting an expansion of 8.8% next year.

COMPETITIVE LANDSCAPE

Indiabulls: Indiabulls Housing Finance Ltd. (IBHFL) is India’s third largest housing finance company, regulated by the National Housing Bank (NHB). The company mainly provides housing finance, consumer finance and personal wealth. Indiabulls Housing Finance, is a Nifty 50 company and has been rated AAA by S&P and Moody's. The company charges interest rate on home loans from 8.65 onwards.

As per Q3 results, net interest income (NII) grew to Rs 809 crore from Rs 750 crore in the second quarter of the current financial year, helped by lower cost of funds. The company has been following a strategy where it is consolidating its wholesale and as that happens, the overall loan book as well as the AUM have declined. PAT declines 40% to Rs 329 cr.

SBI: SBI has one of the most stringent property verification measures during the loan process.  The bank offers loans for house purchase, house construction, home renovation as well as Top-up home loans. SBI Home loan interest rates are linked to CIBIL score and start from 6.80 per cent for loans up to Rs 30 lakh and 6.95 per cent for loans above Rs 30 lakhs. SBI MaxGain Home loan – where the drawing power on the overdraft gets reduced to the extent of the principal component of EMI, is a unique facility than others.

Home loan, which constitutes 23% of Bank’s domestic advances, has grown by 9.99% YoY in Q3FY2021.

HDFC: HDFC home loan interest rates are competitive and offers loans for house purchase, plot purchase, house construction, home improvement, and home extension. HDFC does not offer a fixed rate home loan. Instead, it offers a “TruFixed” Loan the interest rate is ‘Fixed’ for an initial 24 months.

ICIC: ICICI offers home loans for properties up to Rs.5 Crores and up to 30 years loan tenure. ICICI is known for its simplified documentation process, speedy approvals and competitive interest rates. They offer loans for house purchase, house construction, home renovation as well as Top-up home loans. ICICI gives a special reduction on the interest rate if the first applicant of the home loan is a woman. Home loan interest rate is starts from 6.90 %.

PNB: PNB Housing Finance provides a range of home loan products like Home Purchase Loans, Home Construction Loans, Home Extension Loans, Residential Plot Loan and Home Improvement Loans. But does not provide top-up loans. Home loan interest rate is starts from 7.35%.

LIC: LIC Housing Finance provides loans for house purchase, house construction, repairs, plot purchase, home extension as well as renovation. Top-up loans are also available under certain conditions. Home loan interest rate is starts from 6.90 %.

COMPANIES PROFILED

• INDIABULLS
• SBI
• HDFC
• PNB
• ICICI