Feature

Are housing finance stocks on a shaky ground?

Housing finance companies have had a good run thus far but rich valuations are unlikely to sustain in future

Illustration by Kishore Das

Here’s something that could lift your spirits in a falling market, hypothetically speaking, that is. Had you invested ₹1 lakh in stocks of housing finance companies (HFC) beginning FY11 — that is, April 2010 — the money would have trebled to ₹3.3 lakh today, despite the meltdown. This would be far in excess of the Sensex, which would have fetched an additional ₹50,000.

In fact, there is hardly any well-known investor who hasn’t invested in housing finance stocks. Be it Rakesh Jhunjhunwala, Raamdeo Agrawal or Mohnish Pabrai, all of them have taken a fancy to these stocks, and most are sitting on huge gains, as the stocks, on average, have delivered close to 230% return — the highest recorded by Can Fin Home at 566%, followed by Gruh Finance at 522%.

Traditionally, the housing finance market had been largely catered to by banks and very few specialised companies, such as HDFC, Dewan Housing Finance (DHFL) and LIC Housing. That apart, public sector banks were not very active and private banks had a limited presence and resources, opening up the space for newer and nimble HFCs. “HFCs have developed expertise in sourcing and appraisal of housing loans. They have, over the years, evolved as specialists in the home loan market and acquired the skill sets to quickly identify and address the needs arising out of property purchase and financing formalities,” points out Sunita Sharma, MD and CEO, LIC Housing Finance.

Despite a higher cost of funding as compared with banks, HFCs gathered pace because of the reach, aggressive marketing and the size of the market led by a property boom in the country. HFCs have taken over from banks in terms of growth because of the need for specialised housing products, the lending constraint of banks and the government’s emphasis on promoting housing finance by setting up the National Housing Bank (NHB) in 1998. NHB is wholly owned by the RBI, which monitors housing finance lending and provides funds at subsidised rates to HFCs to promote housing for the low-income group. 

While the two old players in this industry, HDFC and LIC Housing, together account for 65% market share, smaller companies are making their presence felt too. Chennai-based Repco Housing, a niche player

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