Affordable Housing has been a compelling dream for India in the past decade, resulting in it making up nearly 50% of all housing sales in the country.
The potential of this segment appears particularly bright because its very nature is in sync with India’s socioeconomic landscape - the rising middle class! To top it up, the government announced incentives under the ‘Housing for All’ scheme, which has further boosted growth in Affordable Housing.
While the Indian middle class makes their dreams come true, there’s a good opportunity for investors to make money too!
What Is Affordable Housing?
Per the government, a house is eligible to be classified in the Affordable Housing segment if
It is below Rs. 45 lakh in value, and
The carpet area of the house is below 645 square feet in metro cities, or below 970 square feet in non-metros
Government Goes All In
The government has gone aggressive on its ‘Housing for All’ scheme. Several initiatives have been launched, and policy support has been a key driver for the high growth seen in Affordable Housing so far. Some of them include:
1. The PMAY (Pradhan Mantri Awas Yojana) which aims to provide housing for all by 2024. It addresses incentives in four key components:
Slum redevelopment: A grant of Rs. 1 lakh per house by the central government to planning and implementing authorities of states
Credit-linked subsidies: Interest subsidies provided to economically weak, low and middle income groups, directly credited to the borrower’s accounts, reducing housing loan and EMIs
Boosting private participation: Rs. 1.5 lakh per house provided to private developers in projects where at least 35% of the houses are for the economically weak
Assistance for construction / enhancement: Rs. 1.5 lakh per family for new construction or extension of existing houses for the economically weak or low income groups
2. Reduced GST on Affordable Housing to 1% (from 12%)
3. Developers can claim 100% tax deduction on profits from affordable housing projects
Growth in Affordable Housing
Responding to policy efforts (and of course the underlying growth of the middle class),
Home sales in India’s eight prime housing markets increased by 13% in 2021 over the previous year
Over 50% of all India’s residential launches in the top eight cities in the last 5 years have been in the sub Rs. 50 lakh segment
In 2021, 2.1 lakh new affordable homes were launched in these markets, up 75% from the previous year
Clearly, people are buying these, and more developers are building these affordable homes!
Stocks that Directly Benefit from Affordable Housing
There are a lot of beneficiaries of the growth in Affordable Housing. People, developers, lenders, and the government itself.
The one segment we’re betting on is of home finance companies, with a large concentration on housing loans for the middle class.
We expect the Affordable Housing space to grow by 15-17% per annum over the next couple of years.
After a careful analysis of all the players, we’ve placed our bet on three stocks:
1. Satin Creditcare (Monopolies)
Satin offers loans to households that are excluded from the formal credit network, and at the bottom of the pyramid. It is a Micro-Finance Institution (MFI) with a presence in 23 states and more than 82,000 villages.
COVID had unleashed a havoc in this segment and on the MFI industry. We now believe the worst is behind. With an augmented capital base the company is ready to chase growth and profitability again.
Satin has been actively diversifying from the MFI business, and has set up a subsidiary to disburse loans in the affordable housing segment. It already has an AUM of Rs. 331 crore in this segment - a growth of 138% from FY20. At parallel, it has also diversified into loans for MSMEs.
The stock has underperformed massively from the post-COVID stress, and we see a case for a strong recovery in business from here.
2. Can Fin Homes (Value Migration)
Can Fin Homes is a housing finance company promoted by Canara Bank. It focuses on low and middle income groups, and first-time home buyers.
It has been able to deliver the best asset quality outcome in the housing finance space, even after COVID. Its NPAs (non-performing assets) are below 1%.
It also has the lowest cost of funds amongst its peer set, and we expect this cost leadership to continue.
We like the stock for its high growth, superior asset quality and adequate provisioning. Since its addition to the Value Migration portfolio in January 2022, the stock is up 15%.
3. Home First Finance (Disruptors)
Home First is uniquely placed because it’s a tech-driven affordable housing finance company. It primarily targets first-time salaried home buyers in the low and middle income groups. These comprise of 80% of its AUM.
It has a strong track record of successfully growing in large affordable housing finance markets through concentrated expansion efforts. Over FY17 to FY20, its AUM saw a 62% CAGR.
Its tech focus spans across its activities. Benefits will accrue in the form of lower TAT, higher productivity, better asset quality and high operating leverage, giving it an edge over its peers.
This has been one of the top performing stocks across our portfolios. Since its addition to the Disruptors portfolio in October 2021, it is up 55%.