The Affordable Housing Index – theme to ride on for five years

> The Union Budget played its part by according ‘Infrastructure Status’ to the affordable housing sector. This will enable developers operating in this segment to raise loans at a cheaper rate, akin to other infrastructure projects. With industry status, banks will be willing to lend more to projects in the affordable housing segment and thus create larger access to funds.

> 100 per cent deduction for profits in a housing project for flats of sizes up to
- 30 sq.m. (carpet area) in municipal limits of Chennai, Delhi, Kolkata and Mumbai
- 60 sq.m. (carpet area) in peripheral areas of metros and other cities
(Period of completion of project for claiming deduction under this section is five years)

> Reduction in holding period from 36 months to 24 months to qualify as long term capital asset and change in base year for indexation from 1981 to 2001 for all classes of assets including immovable property

> Additional exemption of upto Rs 50,000/- on interest paid for loans upto Rs. 35 lakhs with cost of home upto Rs. 50 lakhs.

> Exemption of service tax on construction of affordable houses upto 60 square metres under any scheme of Central Government, state government including PPP (private public partnership).

In addition, the eligibility criteria to avail of the interest subvention has been widened. The Pradhan Mantri Awas Yojana (PMAY) which was announced in June 2015 and focussed largely on serving the needs of the economically weaker sections (EWS) and the low-income group (LIG) has been broad-based its scope by doubling the quantum of loan on offer by creating two new middle-income categories.

Ministry of Housing and Urban Poverty Alleviation has introduced an interest subsidy scheme called Credit Linked Subsidy Scheme (CLSS) under Pradhan Mantri Awas Yojana. This is scheme is expected to cover nearly 65 per cent of the home loan customers.

Prima facie the opportunity size is not only huge but one that will last for at least the next five years which makes it an enticing proposition for investors looking at returns with moderate risk

According to rating agency ICRA, the housing shortage is expected to increase from the current level of 18 million units to 25 million by 2021, based on a stable decadal growth rate. Assuming an average ticket size of Rs 25 lakh per unit, this translates into a market potential of Rs 6.25 trillion for affordable housing projects.

While we may debate on the quantum of the opportunity, there is no denying that the opportunity is large enough to keep heightened investor interest in companies that cater to the ‘affordable housing’ eco system.

Given the myriad stakeholders in this opportunity, we decided to construct an “Affordable Housing Index” that comprises of a set of companies right from housing finance, cement, lighting/fan suppliers, real estate developers, to plywood manufacturers, moulded furniture players, tiles/sanitary ware companies to switchgear manufacturer –the first level beneficiary of this expected boom.

From the home financers, we have picked up selected niche housing finance companies that predominantly lend to individuals. These companies have deeper penetration to Tier 2 and Tier 3 towns and have lower ticket size (usually less than Rs 20 lacs). A Company like Repco has specialised underwriting skills that brings a lot of unbanked population under its fold.

Cement also remains a big beneficiary of the upturn in housing. Two-thirds of the cement demand comes from housing. We have selected entities with stronghold in different regions. The portfolio has the most cost efficient player from the south – The Ramco Cement and Managalam Cement that has a strong foothold in the northern markets.

We also turn our focus to a set of companies involved in home improvement. Our selection from this fast growing (albeit dearly priced) universe is Berger Paints, Akzo Nobel, Cera Sanitaryware, Somany Ceramics, Divyashakti Granites, Century Plyboards and Greenply Industries.

The other key components without which a home is incomplete are the lights, fans, switches and the moulded furniture (especially relevant for budget homes). The companies that have made it to the portfolio are CG Consumer, Orient Paper, Veto Switchgears, Supreme Industries, Prima Plastics and Wim Plast. In addition to being beneficiaries of housing construction, most of these companies are present in segments with substantial unorganised competition and would therefore be gaining post the rollout of the GST (goods and service tax).

Finally, we have also created place for a real estate developer – Mahindra Lifespace that has evinced keen interest in looking at affordable housing as an area of focus.

The Affordable Housing Portfolio has 20 stocks that we will constantly monitor and has a weighted average market capitalisation of Rs 8900 crore. We recommend investors gradually build up this portfolio in the pre-assigned weights as indicated. The number of shares that needs to be considered in a portfolio of Rs 1 lakh has also been indicated.

Given the sharp run-up in the markets and the relatively stretched valuation in some pockets where earnings visibility is high, a Systematic Investment Plan (SIP) approach i.e. to put money at regular interval in this portfolio should yield rich dividend in the long term.