Home financiers turn to lower tier towns for growth

It may surprise to many, but the fact is that the housing finance sector has steadily and consistently been posting impressive growth, despite the numerous challenges in the sector. Their mantra of growth-turn to lower tier towns.

While buying a house in metros like Delhi, Mumbai or even Chennai has been a dream for many, cities like Surat, Ahmedabad, Nasik, Patna, Lucknow and Coimbatore are fast catching up as hot real estate destinations.

With every segment of buyers seeing a rise in their income levels, there is always growth to a next level, like a two-bedroom flat owner buying a three-bedroom flat or owner of an independent house moving to a villa, leading to growth at all levels.

Tier-II and tier-III markets, the growth drivers: Every business in India has been talking about growth happening in tier-II and tier-III markets and the housing finance business is no different.

“In tier-II and tier-III markets, supply is limited and the demand is huge. There is a lot of economic growth in the smaller markets and so the urge to purchase their first house is also widespread,” says VK Sharma, CEO, LIC Housing Finance.

Also, the migration happening from villages and smaller towns to the tier-II and tier-III markets due to new job creation is resulting in real estate purchases, according to industry members.

“There is no dampening of demand in tier-II and tier-III markets and we do not see any effect of high prices or interest rates there. If the house falls within their budget, buyers do not hold back purchase,” points out Manish Srivastava, CEO, Muthoot Housing Finance. In fact, the company, which is a subsidiary of gold loans firm, Muthoot Finance, was launched recently to tap the housing finance opportunities in the smaller markets.

In the eastern part of the country, markets like Ranchi and Durgapur are showing growth for housing finance companies, while in the west, Nagpur, Surat and Aurangabad hold promise. In the central and northern belt markets, like Lucknow and Bhopal are growing, while in the southern part of the country over half-a-dozen tier-II and tier- III towns appear promising for many companies.

“The population of salaried class people in tier- II and tier-III towns of south India is much higher than in other states. So, whether it is Trichy, Salem, Madurai or Erode in Tamil Nadu or Palakkad, Kottayam or Thrissur in Kerala or Vizag, Vijayawada in Andhra Pradesh, there is a lot of economic activity and real estate development, as a result,” says Srinivas Acharya, managing director, Sundaram BNP Paribas Home Finance.

Have metros lost their charm: Few years back, it was fashionable for most real estate development companies worth their salt, to announce luxury villas and expensive gated community projects 20-30 km away from the metros. While many such projects are yet to be completed, even those that have been finished, wear a deserted look largely due to the lack of decent road connecting them to the city.

Even today, many real estate developers announce projects in and around the metros. But, most of these are largely mid-sized projects with the unique-selling-proportion (USP) being the price, which is in the range of Rs.15-35 lakh, indicating where the demand really is.

“We are seeing some staggered growth in the real estate market in the tier-I cities, largely because no new projects are coming up. This is the case especially in cities like Mumbai,” says VK Sharma, CEO, LIC Housing Finance.

“Tier-II and tier-III markets have to be tapped. Yes! But not at the cost of tier-I cities,’ seems to be the mantra of most housing finance companies.

“There is growth across all segments. For value growth, you need the metros, while the tier-II and tier-III towns provide volume growth. If we fund 20 projects worth Rs.10,00,000 each in smaller towns, then one villa for Rs.2,00,00,000 in a metro would make up for all that,” says Anil Kothuri, head-retail finance, Edelweiss Capital.

Also, with computerisation and other advancements, the titles are clear in tier-I cities and metros making the process of loan disbursals easier, he adds.

Low cost housing and micro-mortgaging: These are the new buzzwords for most housing finance companies as there is a large demand waiting to be met in these segments. There are about 21 million households in India with a monthly household income of Rs.7,500-25,000 and could be a target for low-income housing segment. There is an estimated opportunity of Rs.1,100,000 crore in this segment, according to data provided by the National Housing Bank (NHB).

A low-cost house is defined as one that costs between Rs.3-10 lakh and is a highly underserved market. It presents a mortgage opportunity of Rs.8,80,000 crore, NHB says.

Like microfinance, where small ticket loans of a few thousand rupees are given to the poor to help set up or develop revenue-generating businesses, the concept of micro-mortgage or giving small-sized loans for the underprivileged to buy/build a house is also gaining popularity in India.

It is with the idea of providing long-term housing finance for urban low-income families that the Micro Housing Finance Corporation (MHFC) was set up in May 2008 by the National Housing Bank. MHFC has operations in Mumbai, Pune, Ahmedabad and Kolkata and has sanctioned over 600 loans to the tune of Rs.30 crore, as in March. Their target markets, according to the MHFC, are financially excluded, urban, lower income individuals, such as vegetable vendors, barbers, housemaids, drivers and security guards.

“There is a supply side constraint in micro-mortgaging, with the availability of clear titles being an issue. Hence, taking collaterals will be a problem. This has to be fixed to make the loan disbursal process easier,” Kothuri reasons.

Roadblocks ahead: While first-time home buyers are buying despite higher equated monthly instalments (EMIs), caused by interest rate hikes and increasing real estate prices, the party will not continue forever, companies understand.

The interest rate strain may appear to show in buying behaviour sooner than later they say. “We are seeing some dampening in the buyer sentiment. This is seen especially in the tier-I markets,” Srivastava says.

The Q2 and Q3 numbers of housing finance companies have to be observed to really see the direction that the industry would take in the years to come, according to industry experts.

“Disbursals are a continuous process. It may happen even to those loans taken a year ago. But, there appears to be some visible stress in loan sanctioning or signing up new customers. We have to wait and watch if this extends for a longer period,” Sharma cautions.