Is housing finance industry a good industry to invest money? What is the outlook for housing finance industry in 2018? Is this sector overvalued at present? If you have such questions running in your mind then you can get a clear answer for this here.
Housing Finance Industry India Outlook 2018
Before we start discussing on various aspects of this industry let’s understand what is NBFC and how it is different from banks.
What is a Non-Banking Financial Company (NBFC)?
Non-banking financial companies, or NBFCs, are financial institutions that provide certain types of banking services, but do not hold a banking license. Generally, these institutions are not allowed to take deposits from the public, which keeps them outside the scope of traditional oversight required under banking regulations. NBFCs can offer banking services such as loans and credit facilities, retirement planning, money markets, underwriting, and merger activities. Ref Investopedia.
NBFCs are present in the competing fields of vehicle financing, housing loans, hire purchase, lease and personal loans. NBFCs have emerged as key financial intermediaries particularly for small-scale and retail sectors. With easier sanction procedures, flexibility, low operating cost and focus on core business activity, NBFCs stand on a surer footing vis-a-vis banks.
How is NBFC different from banks?
NBFCs lend and make investments and hence their activities are akin to that of banks; however there are a few differences as given below:
i. NBFC cannot accept demand deposits;
ii. NBFCs do not form part of the payment and settlement system and cannot issue cheques drawn on itself;
iii. deposit insurance facility of Deposit Insurance and Credit Guarantee Corporation is not available to depositors of NBFCs, unlike in case of banks. Source: RBI
NBFCs are not required to maintain cash reserve ratio (CRR) and statutory liquid ratio (SLR). Priority sector lending norm of 40% (of total advances) is also not applicable for them. While this is advantageous to them, but they do not have access to low-cost demand deposits as in case of banks.
Types of NBFC in India
NBFC company can be categories into different types depending on the segments they cater into.
Broadly speaking NBFC can be categories as below.
- Housing Finance
- Finance- Leasing and hiring
- Finance- Investment
- Term lending institutions
- Finance- general
Housing finance sector is one of the largest segment for NBFC. We will explicitly focus on housing finance industry here.
Housing Finance Industry Overview
As clearly evident these companies operate in housing segments. The housing finance market in India is fragmented, with 80-plus players. However, two large companies, HDFC and LIC, each has assets over Rs 1 lakh crore, cornering 57 per cent, according to rating agency Icra.
The next batch, of three HFCs; DHFL, Indiabulls and PNB HFL with a book size of Rs 15,000-50,000 crore each have a combined market share of 21 per cent. 5 housing finance companies dominate mkt, lend 78% of home loans: Icra
Issues in NBFC or particularly in housing Finance
Banks moving into NBFC space:
The major NBFCs in India have their relative specializations, for e.g. HDFC (mortgage loans), Mahindra Finance (agri loans), Power Finance Corporation (power finance) & Shriram Transport Finance (pre-owned commercial vehicle loans). The trend of segmental monopoly is changing as banks are entering long-term finance and FIs also meeting the medium and short – term needs of the business masses.
Falling real estate prices:
The big risks could come from falling real estate prices. In fact, the demonetization undertaken in November 2016 did result in a dampening of real estate prices across India. Normally, falling real estate prices results in negative equity. That is normally a case that could lead to default, which be a key concern for HFCs.
Low Return on Assets (ROA) and Return on Equities (ROE):
Although HFCs have seen their average return on equity (ROE) bounce from the lows of 2015, the ROE is still way below the highs touched in 2011. At that point, the ROE of the HFCs was at around 27%, which is now down to about 21%.
The ROA, which had stabilized at around 2.8% back in 2011 has consistently come down to a level of 1.8% currently.
High valuation on Price/Book value front:
HFCs are quoting at over 5 times book value that is nearly twice the P/BV that private banks in India.
Future Outlook for Housing Finance Industry
Even if population growth has slowed down urbanization is witnessing steady growth. Thus demand for new houses is steady.
New Real Estate Regulation Act:
The new Real Estate Regulation Law seeks to set right many shortcomings that currently plague the housing
segment in India. The new law seeks to pin responsibility on developer to deliver the homes on time. This is expected to push non-serious players / speculators out of the arena and bring in transparency as well as confidence in the
Per capital house ownership in India is still one of the lowest:
At a macro level, if you compare with other nations in the West or even in South East Asia, India lags behind other nations in per capita house ownership. The government’s ambitious Housing-for-All project by 2022 is likely create a huge demand for housing. When there is an explosion in demand companies have been known to sustain rich valuations for a fairly long period of time.
Low Cost Housing:
Low cost housing is likely to be the next big story for the Indian investment scenario. According to preliminary estimates, the low-cost housing opportunity in India is estimated to be worth $1.2 trillion. One can imagine the multiplier effect that it will have on demand for housing and for housing finance companies.
Demand for rural and semi urban sector:
With rising rural incomes and the government investing heavily in enhancing rural demand, we could see big demand coming from the rural and semi-urban areas. This will going to benefit hugely yo housing finance companies. Credit: AngelBroking
When government announced about housing for all scheme, housing finance companies went for a dream ride stretching well ahead of their fundamentals. The dream run continued till mid of 2017. Somewhere it had to consolidate to bridge the gap. This is beginning of 2018 and we haven’t seen a clear break out from consolidation yet.
Since there will be election next year, there is no doubt that government will redirect their schemes more towards rural and semi-urban areas and towards middle class. So we assume hosing scheme will get a big boost.
At present we think housing finance is one of the better sector to be in for long term let’s say upto 2022.
Our Stock Picks for housing Finance Industry
We did research for entire housing finance companies and have come up with 5 stand out companies which can give good returns over next 2 to 4 years with limited risk. There could be some near term volatility but long term views remains strong.
1 . Canfin Homes (CMP 492)
2. GIC Housing Finance (CMP 405)
You can contact us for the details analysis for each stock and complete list.
let’s us know about your views on housing finance industry outlook 2018 by adding a comment below. Do share with others if you feel this will benefit.