The residential real estate sector in India is experiencing robust demand, thanks to strong macroeconomic fundamentals. Factors such as improving affordability, rising urbanization, a low mortgage to GDP ratio, favorable demographics, and government policies have been traditional drivers for the growth of the sector.
Pandemic Shifts Consumer Behavior and Boosts Housing Demand
The post-pandemic shift in consumer behavior, with a preference for open living spaces and premiumization, has further fueled housing demand. Additionally, low interest rates and stamp duty rebates have contributed to an upswing in the residential real estate market. Since the onset of the pandemic, housing demand has surged, aided by low interest rates and favorable policy measures. This has led to sales of residential units reaching a decade-high of 470,424 units in CY23, with 467,449 new launches.
Retail Loans Boost Asset Under Management Growth for Housing Finance Companies (HFCs)
Retail loans have witnessed an uptick since FY22, contributing to the growth in the asset under management (AUM) for HFCs. In FY23, the overall AUM of HFCs grew by roughly 9%, with the housing segment growing by 13%. The total outstanding portfolio of HFCs stood at Rs. 7.4 lakh crore, with housing loans comprising Rs. 5.5 lakh crore.
Shifting Portfolio Mix towards Retail Loans
The portfolio mix of HFCs is gradually shifting towards retail loans, with a declining trend in builder loans. This shift is a result of the stress and curtailment in developer financing since the 2019 crisis in the developer and non-banking financial company/housing finance company (NBFC/HFC) sector. However, with a rebound in the residential real estate market, the share of developer financing is expected to gradually increase in the medium term, along with better resolutions and recoveries within the developer financing book.
Improved Profitability for HFCs in FY23
The rebound in the residential real estate market and receding credit costs have resulted in improved profitability indicators for HFCs. Prime housing-focused HFCs have passed on rate hikes to customers, leading to an improvement in margins. With the yield on advances rising faster than the cost of borrowings, HFCs have seen better margins.
Calibrated Approach for Growth and Asset Quality Going Forward
Lenders are expected to adopt a calibrated approach between growth and asset quality. Anticipated interest rate cuts in the future are expected to exert downward pressure on margins. However, overall profitability is expected to improve, largely supported by declining credit costs.
Improvements in Asset Quality and Provision Buffers
Asset quality for HFCs has shown signs of improvement, with improving economic activity and demand in FY23. Net non-performing assets (NPAs) to net worth for HFCs improved from 16.6% to 11.7%, indicating a stronger balance sheet and provision buffers. HFCs continue to hold sufficient provisions to mitigate any credit risks.
Reduction in Wholesale Portfolio Stress
The stress in wholesale portfolios, including delinquencies and the NPA pool of some HFCs, started reducing in FY22. HFCs have shown expectations of better resolutions and recoveries in stranded projects, leading to improvement in asset quality.
Increased Funding from Capital Markets for HFCs
While bank funding remains a major source of funding for HFCs, funding from capital markets is expected to rise. Debt mutual funds’ exposure to HFCs declined after the credit crisis and regulatory changes, but the recently merged HDFC Ltd and HDFC Bank has opened new opportunities for investments in HFCs. Expectations of rate cuts, rising spreads, and stronger HFC balance sheets are expected to increase the share of funding from capital markets in the near to medium term.
In conclusion, the Indian residential real estate sector is witnessing a strong growth trajectory, supported by various factors such as improving affordability, changing consumer preferences, low interest rates, and favorable government policies. The shift towards retail loans and improving profitability for HFCs further indicate positive trends in the sector. With the improving asset quality, provision buffers, and anticipated resolutions in the wholesale portfolio, the overall outlook for the residential real estate market and HFCs remains optimistic.
