Affordable housing outperformance signals BoP demand revival

At first glance, borrowers with limited discretionary budgets appear to have cut back on purchases they can defer. That has caused the sales of entry-level cars and two-wheelers to shrink, with ‘mass-affluent’ variants costing upward of Rs 10 lakh now garnering a disproportionate share of overall automotive sales.

Similarly, consumption of staples, too, has crawled, with several non-discretionary categories – ranging from a sachet of shampoo to cookies – recording stagnant volume sales over the past six months.

But the June quarter shows mortgage financiers of affordable homes are outpacing prime non-bank lenders that fund fancier dwelling units, suggesting the wheels may well be turning in an economy where consumption growth was increasingly reliant on those for whom sticker prices never seemed forbidding.

To be sure, the pace of profit and revenue expansion at India Inc., anchored in mass demand, showed signs of demand fatigue in the June quarter. Of about 2,000 companies that announced their earnings and are tracked by SBI Research, aggregate revenue climbed around 4%, while operating profits for the non-financial listed universe expanded at 8%. Revenue growth fares marginally better when financial companies are included – at 5.4%.

The gross value added, or GVA, of the listed universe of about 2,500 companies climbed at the slowest pace in the first quarter since the September quarter of FY23, CapitaLine data analyzed by SBI Research showed.

Against this backdrop, therefore, the performance of mortgage lenders targeting affordable home buyers stands out, especially due to the relative price inelasticity one has come to associate with this class of borrowers.

Growth Leaders

Of the 12 pureplay mortgage lenders that have nearly Rs 7 lakh crore of assets under management, aggregate growth has been in double digits in the June quarter for most companies barring the biggest in this space – LIC Housing Finance. With nearly Rs 3.1 lakh crore of assets, its muted showing overshadowed the pace of growth at Bajaj Housing Finance (24%) and PNB Housing Finance (13%).

But what would be more comforting to economists searching for signs of a demand revival at the less financially resilient end of the demand spectrum is the collective performance of smaller mortgage lenders that, literally, are funding affordable homes – often away from the metropolitan cities and in smaller towns.

Companies such as Home First, Aptus, Aavas, Aadhar Housing and India Shelter logged asset expansions ranging from 16% to 34% in the June quarter, despite expected headwinds to individual incomes.

To be sure, smaller operating bases exaggerate the growth effect for many of these lenders, although the larger ones among them have clearly outshone several prime financiers with comparable balance sheets.

“Affordable housing finance companies continue to outpace larger peers on AUM growth,” Centrum said in an assessment after the first quarter earnings. “Disbursement momentum remains weak across the sector… NII growth remains strong across all AHFC’s as benefits from easing borrowing costs start to materialize.”

As funding costs continue to head south for several of these borrowers, such as Aptus and Home First, most of these lenders are expected to post stronger core profitability, given a higher proportion of fixed-rate disbursements that provide a cushion in a falling rate cycle.

Morgan Stanley’s ‘overweight’ NBFC recommendations, therefore, have a meaningful presence of mortgage lenders, with three such companies featuring in the list of 11 financiers that include a whole spectrum of listed assets – from mega caps to micro caps.

This space is expected to find further traction – and investor attention – as loans tied to internal benchmarks get repriced more quickly through the second half of the year, providing further cushion to mortgage backers of affordable homes.