HFCs on a Budget High Won’t Find Easy Growth
Face issues like lower real estate prices, competition from banks that cut rates post demonetisation
ET Intelligence Group: Stocks of housing finance companies (HFCs) are expected to gain from the sops announced in Budget for low-cost housing. While most HFCs have rallied over 5% since February 1, more appreciation may not happen since the Budget also discourages investment demand in the housing market. HFCs face structural hurdles of lower real estate prices and increased competition from banks, which have cut home loan rates.
It is not surprising then that only a handful of listed players have seen earningsupgradessinceNovember8.
There are several favourable announcements for affordable housing in the Budget. Granting of “infrastructure” status may bring more refinancing opportunities for HFCs. Higher allocation of ₹ 1,400 crore towards interest subvention for the Pradhan Mantri Awas Yojna (PMAY) and the change in definition of affordable housing from built-up area to carpet area are good opportunities for the ₹ 8.2-lakh crore housing loan market.
However, the Budget has also put a limit of ₹ 2 lakh for deduction of loss under income from house property for second homes. This measure may impact the investment demand, especially in top 7-10 cities, which account for 45-65% of HFC loan books.
Furthermore, demonetisation is expected to bring about structural changes in the realty market, including downward pressure on prices. In thisscenario,thehigheryieldingloan segments — developer or construction loans and loan against property (LAP)—maygetimpacted.Thesesegments command higher yields in the range of 13-15% and 11-13%, respectively compared with individual housing loans that yield 9-10%.
In January, banks aggressively cut their incremental lending rates termed as MCLR (marginal cost of funds based lending rate). This is likely to affect yields of the housing loan segment. HFCs, including Indiabulls Housing Finance and LIC Housing Finance, have reported about 90 bps drop in incremental yields in the segment since January compared with the previous quarter.
While a drop in cost of funds may commensurate with the yield decline, HFCs such as HDFC, LIC Housing Finance, and Gruh Finance that have lower proportion of bank borrowings are less likely to enjoy the direct benefit of lower MCLRs.