Assignment of Varun Singh
PGDIM-15, NITIE
2008-2010
Date of Posting 16 February 2009
Learner Assignment -Data, Information, News, Analysis and Valuation
Data and News Relevant for analysis and valuation of the industry will be given in this knol as a part of learning effort by students of investment analysis, security analysis and equity research courses.
The information is meant for demonstrating the application of textbook principles by learners only. It is not for commercial decision making by investors. Investors are advised to contact and consult registered investment advisors only.
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Industry Classification
Life cycle position
Housing finance as a financial service is relatively young in India. The growth in housing and housing finance activities in recent years reflect the buoyant state of the housing finance market in India. The real estate sector is the second largest employment generator in the country.
In 1970, the state set up the Housing and Urban Development Corporation (HUDCO) to finance housing and urban infrastructure activities, in 1977, the Housing Development Finance Corporation (HDFC) was the first housing finance company in the private sector to be set up in India.
Currently there are 29 HFCs approved for refinance assistance from NHB.
The following types of home loans are generally available in the market:
· Home Equity Loans: A form of finance to the customer by way of mortgage of existing property to the financier for taking a loan for some other purpose. The current market value of the property is the basis for providing home equity loans.
· Home Extension Loans: The purpose of this loan is the extension of existing houses tike the addition of rooms, toilet facilities etc. Such loans fall under the category of home loans.
· Home Improvement Loans: These loans are provided mainly for repairs and maintenance of existing houses- These could include internal and external repairing, waterproofing and roofing, complete interior renovation, tiling and flooring etc.
· Home Purchase Loans: Finance provided for the purchase of ready-made houses.
· Land Purchase Loans: These loans are being provided for the purchase of land for the purpose of construction of residential houses.
Business cycle
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External Factors
Government
Policy Annoucement in Last Quarter
NBFCs’ growth had been constrained due to lack of adequate capital.
On 2 January 2009, the government and the Reserve Bank of India announced another set of measures to stimulate the economy, after having announced a few measures in December 2008. The package focuses on:
Reviving demand for the housing sector by facilitating Rs.4,000 crore refinancing facility for National Housing Bank (NHB), granting priority sector lending status to loans upto a maxi mum limit of Rs.20 lakh per dwelling per family by housing finance companies with the approval of NHB, concessional treatment to commercial real estate loans which have been restructured upto 30 June 2009 and lowering the interest rates on home loans upto Rs.20 lakh.
The package will not provide a major boost to the residential market immediately as property prices play an important role while making a buying decision. Property prices continue to remain high with an average home in metro cities costing well above Rs.20 lakh, the upper limit of the amount on which interest rate concession is granted.
The government eased the external commercial borrowing (ECB) norms by allowing non-banking finance companies and housing finance companies to raise money overseas through FCCBs subject to RBI approval.
General Policy
Policy Changes Expected in the Near Future
Social
The mortgage penetration continues to remain abysmally low – in India the mortgage to GDP ratio is at around 6% (in FY08) against over 51% in the USA. Even if one were to benchmark against more comparable counterparts, the ratio ranges from 15% to 20% for most South East Asian nations.
High down payment requirement and non-availability of the title deeds in the absence of land records are some of the reasons responsible for the inability of the companies in reaching out to the vast population living in rural areas.
Demographic
Housing finance assistance of formal institutions has been limited to the middle-income and high- income groups. Companies have also not been able to penetrate the rural areas.
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Demand Analysis
End users
The housing finance sector in India has undergone unprecedented change over the past two decades. The consumption pattern amongst the Indian population is expected to change 2013. The strivers are less but aspirers and rich are significant higher compared to 2003.
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Real and Nominal Growth
The tower interest rate regime, rising disposable incomes, stable property prices and fiscal incentives made housing finance attractive business for commercial banks. Further, housing finance traditionally has been characterized by low nonperforming assets (NPAs) and given the vast demand for housing loans, almost at t the major commercial banks plunged into the business of housing finance. The robust growth during the last decade has been triggered by a number of factors, some of which are listed below:
· Tax rebates on housing loans announced consistently in the annual budgets of the country.
· Fatting interest rates on home loans: Fixed interest rates calculated on an annual rest basis for a loan of Rs. 1 million for tenure of 15 years have fatten from 16% in 1997-98 to 9.5% in 2005-06. Floating rates for short maturity housing loans are today hovering in the range of 7.75-9.75%.
· Greater amount of professionalism of the real estate developers and builders who are capable of acquiring clearer titles and completing the projects on time.
· Borrowers can raise up to 100 % of even 110% (in which case the tenders provide financial assistance for the complete property value, stamp duty, registration and an additional 10% is given for the interior decorations) of their borrowing requirement from the tenders.
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