With an estimated 95 million units shortage, the Affordable Housing Finance (AHF) Market is anticipated to reach INR 6,242 billion (US$ 75.2 billion) by the end of FY 2025.
Wizergos uncovers the potential of this market, along with a blueprint to build a greenfield AHF business in a 3 article series. This is the first article that helps businesses take a stock of the opportunity, challenges, and dynamics to strategize their entry into this market.
"Roti, Kapda, aur Makaan". Makaan still remains elusive for ~32% Indian families.
As India undergoes rapid urbanization, with an estimated 30% of its population already residing in towns and cities, the pressure on urban infrastructure continues to mount. Projections indicate that by 2030, this urban population percentage will soar to 50%, reflecting a significant shift from rural to urban living.
However, this transition has not been without its challenges, particularly in the realm of affordable housing. Over the past few decades, the proliferation of informal squatter settlements in cities has highlighted the severe shortage of habitable accommodation. Many urban areas grapple with substandard living conditions, as the housing market struggles to keep pace with the escalating demand spurred by the influx of people from rural areas.
According to a report by the Reserve Bank of India (RBI), the housing shortage in India is estimated to be a staggering 100 million units.
Type of Housing | Housing Shortage Number (Million Units) |
Economically Weaker Section (EWS) | 45 |
Low-Income Group (LIG) | 50 |
Middle Income Group (MIG) & Above | 5 |
Total Housing Shortage | 100 |
Ideal Target Segment for Affordable Housing (EWS+LIG) | 95 |
Source: Report of the Committee on the Development of Housing Finance Securitisation Market (Sep’19), DART
The thrust on Affordable Housing and related financing has only strengthened over the last 3-5 years.
Affordable housing has emerged as a cornerstone of India's real estate market, reshaping the industry's dynamics and offering promising opportunities for developers, buyers, and financial institutions alike. With a growing population and increasing urbanization, the demand for affordable housing has skyrocketed, prompting significant investment and innovation in this sector.
Affordable housing represents a substantial and dynamic segment within India's real estate industry. It caters to the needs of low and middle-income households, providing them with access to decent and affordable housing options. This segment encompasses a wide range of housing projects, including multi-story apartments, gated communities, and integrated townships, designed to meet the diverse preferences and requirements of urban dwellers.
One of the key drivers behind the surge in affordable housing is the government's focus on initiatives such as the Pradhan Mantri Awas Yojana (PMAY). Launched in 2015, PMAY aimed to provide affordable housing to all urban households by 2022, with a particular focus on economically weaker sections (EWS) and low-income groups (LIG). The scheme offers financial assistance and subsidies to eligible beneficiaries, incentivizing developers to undertake affordable housing projects and facilitating access to home ownership for millions of Indian families.
~5 million units have been completed as of May 2022 in ten states alone.
Source: The Ministry of Housing and Urban Affairs
A Sunshine Sector for Financial Services:
India Affordable Housing Finance Market (Lending) is slated to reach INR 6,242 billion (US$ 75.2 billion) by the end of FY 2025.
For financial institutions, affordable housing presents lucrative lending opportunities. Banks, housing finance companies (HFCs), and non-banking financial companies (NBFCs) are increasingly offering customized loan products tailored to the needs of developers and buyers within this expanding industry. These products often feature competitive interest rates, flexible repayment terms, and simplified documentation processes, making them attractive options for both parties.
In the last 6 years especially, there has been growth in Affordable Housing Loan from INR 2,376 billion in FY 2015 to INR 4,233 billion in FY 2021 and is expected to grow at a CAGR (compounded annual growth rate) of 9% to reach INR 6,242 billion by FY 2025.
What will drive this market for the next 5 years?
The affordable housing market in India is anticipated to witness unprecedented growth, fuelled by a confluence of factors ranging from population expansion and urbanization to governmental initiatives and regulatory measures. These drivers are reshaping the landscape of home loans and presenting unique opportunities for lenders and borrowers alike.
Factors such as population expansion, urbanization, rising incomes, and governmental initiatives such as PMAY (Pradhan Mantri Awas Yojana) and interest subsidies are fuelling the demand for home loans within the nation.
The recent regulatory measures by the RBI, which involve tightening risk weightage requirements for unsecured personal loans in the retail sector, specifically exclude housing loans. This suggests a favourable trend for housing loans in the future, providing a potential advantage for lenders.
In terms of the quality of the portfolio growth and credit costs, this product has consistently outperformed all other categories of retail loans, maintaining the highest standards. This is a positive signal for this segment over the next 5 years.
Overcoming challenges in credit underwriting, such as assessing income and evaluating property amidst irregular income streams and a lack of formal documentation, was achieved through the utilization of cutting-edge applications leveraging technological advancements. Technology based advancements in these functions are slated to drive up efficiencies, bottom line, as well as reach for the AHF players in the future.
The RBI's priority sector lending (PSL) guidelines for housing loans, which set ticket sizes between ₹25 lakhs to ₹35 lakhs for non-metros and metros respectively, have been a significant factor prompting financial institutions to delve into the affordable housing loans business. Recent government announcements.
Roadblocks for Affordable Housing Market in India
Despite the positive outlook, challenges remain:
Limited land availability: Especially in urban areas, finding affordable land for development can be difficult.
Complex regulatory environment: Streamlining the approval process for affordable housing projects is crucial.
Financial literacy: Educating potential borrowers about different loan options and responsible borrowing practices is vital.
Operational and Technology related hassles. The segment and the loan product presents unique operational and associated technology hassles. A key issue lies in underwriting of the loan product for the target segment. Following is a list of the key challenges faced in underwriting:
Evaluating the applicants based on irregular income patterns from unorganized sector.
Assessing credit limits in the absence of structured salary slips or income proof documentation.
Establishing the genuinity of the documents.
Difficulty in property evaluation as they are distributed outside the city/town limit.
Evaluating the ability of the applicants to service loans when bank statements are unavailable.
The Road Ahead
The future of the affordable housing loan market in India is bright. With sustained government support, innovative solutions, and a focus on financial inclusion, millions of Indians will have the opportunity to unlock their dream of owning a home. This not only creates stability and well-being for individuals and families but also contributes to the overall economic growth and social development of the nation.
Over the next two weeks, Wizergos will publish the remaining 2 parts of this article series on Affordable Housing Loans in India.
Part 2- Affordable Housing Loans Market in India: Who's Who?
The Affordable Housing Loans Market is dominated by larger established Banks, NBFCs, and new-age Fintech firms. Read this article to appreciate the key players in the market and competitive dynamics being played out in this space.
Stay tuned!
Part 3: Blueprint to build a greenfield Affordable Housing Loan Business or Product
Author
Sudapalli Jaya Prasad Rao
Vice President - BFSI, Wizergos