India Strategy (Housing Boom Ahead) 20170428

Housing boom ahead Market strategy, April 2017

India Research Team Mahesh Nandurkar Executive Director +91 22 6650 5079

Chirag Shah

Investment Analyst +91 22 6650 5055

Aashish Agarwal Head of India Research +91 22 6650 5075

For important disclosure information, please refer to pages 154-155 of this presentation.

For important disclosure information, please refer to pages 154-155 of this presentation.

    

Contents Page Investment thesis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 Social-housing potential . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 Improving affordability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 Challenges & roadblocks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45 Building materials . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49 Housing finance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 103 Property developers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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127

Executive summary

M Mahesh Nandurkar

Executive Director +91 22 6650 5079

Chirag Shah

+91 22 6650 5055

Aashish Agarwal

odi’s housing-construction initiative aims to build 50m new low-cost houses over the next five years. The government will use subsidies and cheaper loans to achieve its ambitious social-housing scheme, while its success in recent state and municipal elections extends policy visibility to 2024. Better affordability also implies a broadbased property-market recovery from FY18. Our top picks are HDFC, Indiabulls Housing Finance, Crompton Consumer, Astral, Godrej Properties and Sobha. Key big picture numbers We expect close to 60m new houses to be built at a total spend of Rs83tn (US$1.3tn) during FY18-24. This should lead to c.2m new jobs and 10-12m tonnes of incremental cement demand each year and a cumulative home-loan disbursal of Rs50tn (US$800bn). Improving affordability In the past five years, mortgage rates have dropped 250bps, property prices have remained broadly stable and per-capita incomes have posted a 10% Cagr. Housing subsidies further boost affordability. We expect slow property sales to reverse from 2HFY18 with the affordablehousing (unit price less than Rs5m) segment turning the corner. The premium housing recovery should happen from FY20.

Challenges & roadblocks A key challenge to our thesis is the ability to execute, especially on the PMAY Urban scheme. But the expansion of subsidy limits should incentivise private-sector participation. Funding is another roadblock but strong political will should address this issue. Demonetisation has impacted property-market sentiment but close to all-timebest affordability should kick-start demand. Financiers, building materials and developers Housing finance and cement companies will be obvious beneficiaries of this multi-year theme. Aside from these, a host of building-materials subsegments such as tiles, sanitaryware, plywood, electrical lighting and other household durables are likely to see strong demand over the next three to five years. Top stock picks Our top BUYs on this theme are Housing Development Finance Corp and Indiabulls Housing Finance as funding plays; Astral and Crompton Consumer among materials producers; and Godrej Properties and Sobha from a developer perspective. We also rate Ultratech Cement and Pidilite as Outperforms.

Social-housing potential The government’s ‘Housing for all’ programme is rolling out. Pradhan Mantri Awas Yojana (PMAY) Rural has already scaled up, constructing 2.5m houses during FY17, and is likely to ramp up to 4m/year by FY24. PMAY Urban has been a slow starter but the recent extension of the housing-loan subsidy to people earning up to Rs1.8m/year should accelerate this component.

Head of India Research +91 22 6650 5075

See Mahesh and Chirag on CLSA TV

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Contributing analysts

Abhinav Sinha

Aditya Jain

Alok Srivastava

Bhavesh Pravin Shah

Prakhar Sharma

Vivek Maheshwari

+91 22 6650 5069

+91 22 6650 5009

+91 22 6650 5054

+91 22 6650 5058

+91 22 6650 5037

+91 22 6650 5053

We would like to thank Evalueserve for its help in preparing our research reports. Aniket Sethi (Cement, Oil & Gas); Dhruvesh Shah (Capital Goods, Utilities, Power); Nikhil Gada (Midcaps); and Vishal Nathany (Financials) provide research support services to CLSA.

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Interview with Deepak Parekh The government has given a huge thrust to affordable housing. How do you see this panning out for the sector and the Indian economy?

Deepak Parekh Chairman, HDFC

In over 40 years of my professional life, I have never seen India in as strong a position as it is today. The stable macroeconomic fundamentals combined with strong political capital have made India very attractive for investors.

As far as housing is concerned, this government in its election manifesto had emphasised its vision of Housing for All by 2022. We have always maintained that the key role of the government is to create the enabling environment for housing. I think the present government has delivered on this. To my mind, the Union Budget 2017-18 will go down in history as the “affordable housing budget.” What are the key changes you expect to see in the housing and housing-finance space? The government is rightly firing on all cylinders to boost housing growth. Incentives have been given to all constituents - developers, home-loan borrowers and lenders. One knows of the multiplier effects that housing has on the economy.

The rationalisation of provisions to encourage affordablehousing projects has led to a number of well-respected developers who have, or are in the process of launching, such projects. I cannot think of any other key sector that has a 100% deduction on profits and gains for a period of five years. This makes me quite confident that supply will scale up rapidly. The borrower has benefitted from lower interest rates and continued fiscal benefits on home loans. The widening of the government’s Credit Linked Subsidy Scheme (CLSS) to include the middle-income group is another gamechanger. The burden for a borrower is always making the downpayment and paying the initial equated monthly instalments (EMI). This is where the upfront subsidy given to the borrower helps. Another very sensible measure is allowing the withdrawal of up to 90% of the employees’ provident fund to buy a house and service the EMI. For the lenders, the granting of infrastructure status for affordable housing means access to lower-cost, long-tenor funding from external commercial borrowings, insurance companies and pension and provident funds. Masala bonds have opened up a new source of funding from overseas investors and the advantage is that the currency risk is not borne by the lender.

Continued on the next page

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Interview with Deepak Parekh (cont’d) How can housing be made more affordable for the common man?

What is your take on India’s future?

I have been saying this for a long time that we have to find ways of ensuring that land prices come down. Banks and housing finance companies (HFCs) have been prohibited from funding land transactions. This regulation was brought in about a decade ago, when there were fears of excess speculation in real estate.

It’s very exciting. There are a lot of incremental reforms and big, structural reforms happening simultaneously. As far as the urban agenda is concerned, there is greater inter-ministerial coordination. Even at the state level one is seeing an integration of transport, infrastructure and housing, which are all factors to improve livability in our cities.

Developers have to resort to high-cost borrowing from private equity firms, nonbank finance companies or other sources to fund their purchase of land and these are at rates as high as 18% to 20%. It is only after the approvals are in place that banks and HFCs can fund the construction cost. If there are sufficient checks and balances in place to allow banks and HFCs to fund land transactions, the overall cost for the ultimate consumer will come down.

No doubt, there are many challenges given the acute housing shortage. But the reason for optimism is that there is a clear vision and a clear path to achieve that vision. Right since the inception of HDFC, I have always maintained that there is nothing more beneficial for a country than building a property-owning democracy.

The other issue is the need to fast-track approvals. But I think many states are now getting their act together. The states that work faster on the ease of doing business will be the ones to garner larger resources.

CLSA reached out to Mr Parekh to understand his views given his vast experience and expertise in the housing sector

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Huge latent demand for housing in India 280m households in 2016 But only 190-200m permanent-structure houses Current population growth @ 1.3% pa

Demand for 3.4m houses pa

Ongoing nuclearisation @ 0.9% pa

Demand for 2.5m houses pa

Rising income/aspirations per-capita GDP growth at 9-10% pa nominal

4-5m houses pa will bridge half the housing gap in a decade

Total latent demand for housing 10m+ pa

Source: Census of India, MoSPI, NSSO, CLSA

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Two drivers of housing upturn Best ever affordability¹ including government subsidies Affordability: Mortgage payment to post-tax Income ratio

(%)

80

60 41

40

30

27

24

28

39

32

30

23

33

36

34

34

32

27

30

26

 Interest subsidy extended to midincome group

22

20

 Tax incentives for constructing affordable houses

 Stable property prices for 3+ years  Steady income at 9-10% Cagr

 Mortgage rates down 250bps from 5-year peak, effective 15% reduction on mortgage payments

Improving affordability

FY18CL

FY17

FY16

FY15

FY14

FY13

FY12

FY11

FY10

FY09

FY08

FY07

FY06

FY05

FY04

FY03

FY02

FY01

0

 90% of govt run pension fund EPFO can be withdrawn for home purchase

 Central govt offers direct subsidy for social housing

 Strong political will under Modi’s ‘Housing for All’

 States sending projects/adding to schemes

 Target to build 50m homes over five years

 Rural social housing picks up

Government support

Source: SBI, CLSA ¹Affordability refers to houses costing Rs3.0m

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Affordable house: More for less Homes in the Rs2.0m-3.5m segment have become 10-15% cheaper since January 2017 . . . . . . due to central government’s expanded interest-subsidy scheme providing up to Rs235,000 loan-principal reduction for non-home owners with annual income up to Rs1.8m . . . and mortgage cut by 50bps Same buyer can afford a bigger house at lower stress on his income FY12

FY18

Income (Rsm)

0.5

0.8

10% income Cagr

Loan limit (Rsm)

1.5

2.4

Assume at 3x annual income

LTV

70%

70%

Remaining funded by equity

House price (Rsm)

2.1

3.4

Implied as above

Property rate (Rs/sf)

3,200

4,000

About 25% higher; c.5% Cagr

House size (sf)

670

857

A 28% bigger house can be owned

Mortgage rate (%)

10.8

8.6

Rates near 12-year lows now

Loan subsidy (Rsm)

0.0

0.2

Loan subsidy introduced from Jan 17

Ex-subsidy loan amount (Rsm)

1.5

2.2

Impact of tax shield and subsidy

Monthly mortgage payment (Rs)

15,279

18,926

28% bigger house for 24% higher costs

Mortgage payment to income ratio (%)

37

28

Much improved

28% bigger house and much more affordable

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Source: CLSA     

Houses constructed (m)

Residential mix to shift towards volume

10.9m 4.5m

7.9% of GDP

Housing expenditure (Rstn)

Spend

Flat

6.4m

6.3m

8.1% of GDP

5.5% of GDP

4.6% of GDP

Flat

Premium pickup

Rs7.0tn

Rs7.0tn

FY12

FY17

Social pickup

Rs16.8tn

Affordable pickup

Rs2.0tn FY03

FY24 FY18

FY19

FY20

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Source: Census of India, MoSPI, RBI, NHB, CLSA     

Opportunity pyramid House price range

Market size (Rstn)

Market size (Rstn)

0.4m Premium >Rs0.5m

0.3m

Affordable Rs0.2-0.5m

Social