India’s housing finance sector saw a tenfold jump in primary fundraising in 2024, as venture capital and private equity firms sought to diversify their portfolios with assets perceived as relatively less risky.
Rising housing demand, as well as the ability of mortgage lenders to contain costs at crunch times and generate sustained returns have attracted investments, investors and industry experts said. As more opportunities open up beyond the metros, they expect the momentum to continue in 2025 as well.
In 2024, housing finance companies raised a total of $826.8 million across nine rounds against $82.6 million spanning five rounds a year earlier, data from market intelligence provider Tracxn showed.
Some recent deals include Vastu Housing Finance’s $100 million fundraise from Prosus in December, and Vridhi Finserv Home Finance’s $37 million round by Norwest Venture Partners and Elevation Capital in September. Private equity firm Multiples Alternate Asset Management, which has also backed Vastu, invested in Shubham Housing Finance’s $47 million round alongside other investors this month.
“Over the last 12-18 months, tech-first investors have also realized the attractiveness of conventional lending segments, especially affordable housing finance, and have ventured into this space. The fast-growing nature of this market, under-penetration, profit pools and ability to tap the initial public offering markets have made it even more enticing,” said Apoorve Goyal, managing director of India Investments at Prosus.
“From a portfolio construction standpoint, investors have realized that it’s good to have certain investments, which are more stable and generate matured returns,” he said. While returns may not be spectacular, housing finance offers long-term compounding growth potential with relatively less risk, Goyal added. “In contrast, returns in tech assets could go either way depending on several factors.”
Major buyouts
The housing finance sector has also witnessed major buyouts such as New York-based private equity firm Warburg Pincus’s ₹4,630 crore acquisition of Shriram Housing Finance Ltd in May for equity and convertible instruments, and EQT’s 100% acquisition of Indostar Home Finance for ₹1,750 crore in September.
“Affordable housing finance continues to be a huge macro opportunity with the ability to build large scaled-up institutions,” said Nithya Easwaran, managing director of Multiples, explaining the rationale behind its second investment in mortgage finance. “Credit performance has stood strong even through external shocks like the pandemic. Over the next decade, I do believe that the competitive intensity will increase and value can be created through the adoption of deep analytics, driving operating efficiency and retaining customers through best practices,” Easwaran said.
As per the National Housing Bank (NHB), an entity that supervises housing finance companies, India has 82 mortgagelenders. Currently valued at $300 billion, India’s home loan market is expected to expand at a CAGR of 22.5% over the next five years, as per market intelligence platform Mordor Intelligence. The home loan market has witnessed significant growth over the past decade, driven by increasing urbanization, rising disposable incomes, and government initiatives to promote affordable housing.
Active over past decade
To be sure, PE investors have been active in housing finance over the last decade, while VC firms that have typically focused on the tech sector are just waking up to the potential for lending, the addressable opportunity in the sector, and its ability to give superior returns.
“Housing is one of the most fundamental human needs and has a very large addressable market with the population that we have and are going to add in the coming years. Mortgage penetration in India continues to be significantly lower compared to developed economies like the US and China,” Prosus’ Goyal said.
“Investors like us are always on the lookout for such sectors which are very large and have the potential to continue to grow for decades,” he said. Affordable housing finance companies, Goyal added, have also been able to demonstrate lower credit cost across cycles as compared to other sub-sectors of lending, leading to attractive risk-adjusted returns.
Also read | Japanese M&A interest makes a strong comeback in 2024
Housing demand that benefited from stable interest rates over the last decade has increased investor interest, said Gopal Jain, who co-founded Gaja Capital. The private equity firm, alongside Lok Capital, infused ₹800 crores in Weaver Services Pvt. Ltd, an affordable housing finance company founded by former employees of HDFC Ltd in October. Growing urbanization is also expected to improve prospects for the sector, Jain said, adding he expects the momentum to continue through next year.
Growth from tier-III, -IV
Several investors and industry experts have also noted that the next level of growth for affordable housing finance companies may come from tier 3 and 4 towns where existing companies will start selling for those customers who do not have the same kind of capital or choices as those in the metros. These customers typically belong to economically weaker and lower-income sections.
Growth in the sector will be driven by affordable housing demand, especially tier 3 and 4 towns with loan sizes ranging from ₹5-25 lakh for self-construction, renovation and purchases, said Abhijit Chiripal, managing director of DC Advisory. The affordable housing finance space, currently about ₹4.5 trillion, will grow at 15-20% per annum for the next 5 years, he estimated. The firm advised Ummeed Housing Finance on its $76 million fundraise in July.
“Specialist housing finance companies who possess technology and local expertise to assess these thin file customers (largely self-employed) have created a successful business model of scale plus high return on equity,” Chiripal said. “This, in turn, has generated healthy interest from private equity investors in the sector, with the majority of affordable housing finance companies delivering north of 30% returns per annum last 10 years.”
Prominent IPOs
The housing finance sector saw some of its most prominent IPOs this year. Bajaj Housing Finance went public in September with an issue size of ₹6,560 crore, while Aadhar Housing Finance had a ₹3,000 crore IPO in May.
“Prior to its merger, HDFC Ltd was the leading public market play on housing/housing loans. Post its merger with HDFC Bank, there emerged a clear gap in public markets which was an opportunity for other emerging housing finance companies. New listed companies like Bajaj Housing and others are exploiting this opportunity,” Gaja’s Jain said.
Earlier this month, Prosus also highlighted that Vastu is among the future IPO candidates in its latest earnings presentation. Investors anticipate a few other companies to go public in the near term after they reach a certain scale.
#Big #money #finds #love #sector
#Big #money #finds #love #sector