Leading fund-house ICICI Prudential MF has announced the launch of ICICI Prudential Housing Opportunities Fund, an open-ended equity scheme. The New Fund Offer (NFO) opens on March 28 and closes on April 11. The thematic fund will invest in stocks of companies engaged in and/or expected to benefit from the growth in housing theme. The housing-based thematic fund space till now only had HDFC Housing Opportunities Fund, which was earlier a close-ended scheme.
Housing theme
In day-to-day life, housing is one of the three basic needs of any individual; food and clothes being the other two. Fundamentally, housing is a big investment theme given the influx of people into cities and the consequent need for accommodation. This is also why real estate sector, from a potential perspective, is very promising.
But despite demographics, urbanisation in favour, housing sector has faced multiple headwinds such as supply-demand mismatches and debt problems of developers. The cost of owning a home has risen, making affordability a big issue even though financing options are available. Low interest rates, government policies and targeted sops have been announced. With macro events such as the pandemic now behind us, there is some hope that housing will see a new upcycle i.e. demand indeed improves, price improves and inventory is reduced.
Expectations have already driven up stock prices, with BSE Realty (comprising real estate stocks) in the last one year rising 33 per cent vis-a-vis 17 per cent for the Sensex. With muted gains from lands and buildings since 2013 leading to time correction of physical assets, the segment is not expensively valued. For instance, on price to book terms, BSE Realty stock basket trades at 3 times compared to 3.5 times for the Sensex.
Fund strategy
ICICI Pru Housing Opportunities Fund, to be managed by Sankaran Naren and Anand Sharma, aims to invest in equity of entities engaged in and/or expected to benefit from the growth in housing theme.
The actively-managed scheme will invest in basic eligible industries (19) that form a part of Nifty Housing index (launched in February 2022). Housing as a theme encapsulates various sectors such as cement, consumer electronics, housing finance, banks, power, steel, LPG/CNG/PNG/LNG supplier etc. So, the main thrust will be real estate developers, financial services providing housing finance and other industries such as cement, consumer electronics, paints, steel, home appliances and sanitary ware.
If you look at Nifty Housing index, the top-10 constituents are L&T, Asian Paints, HDFC Bank, ICICI Bank, Tata Steel, Ultratech, HDFC, Adani Green Energy, NTPC and Grasim. It remains to be seen what kind of active share — the fraction of a fund's portfolio holdings that deviate from the benchmark index — ICICI Pru Housing Opportunities adopts.
Its lone peer, HDFC Housing Opportunities Fund's top portfolio constituents are L&T, HDFC Bank, SBI, ICICI Bank, NTPC, HDFC, Ambuja Cements, Prestige Estates, Ashoka Buildcon and Tata Steel. It has small exposures (1 per cent or less) to realty stocks such as Macrotech, Shriram Properties. Do note: the fund has under-performed a broad market index such as BSE 500 in one- and three-year time periods. Since turning open-ended in January 2021, the fund has given 19.65 per cent return.
India still does not have a large enough number of listed real estate companies for a fund to invest in them.
Know the risks
The success of housing as an investment theme depends on whether the anticipated turnaround will play out. This is not particular to this theme alone. And, this is why thematic equity exposure as a share of overall portfolio is usually advised to be 5-10 per cent for an investor with average risk appetite.
At this moment, the anticipated up cycle in housing is not a sure-shot thing. While there are green shoots, housing can thrive in the long-term when affordability is manageable. Low interest rates may be a reality today, but given the inflation trajectory and global rate cycle, domestic loans may not remain cheap on a sustained basis. Plus, the income outlook of borrowers needs to remain rosy for a long period of time for them to commit to a long-tenure liability. Bright income outlook for over 10- and 15-year periods is only a preserve of technology professionals today, while most other sectors are getting disrupted.
Investors should also note that housing-focused thematic funds are investing majorly in financial services, consumer goods, cement, construction, power, metals and oil and gas sector stocks, apart from realty. Buying Asian Paints, L&T, HDFC Bank, ICICI Bank, NTPC, HDFC, Ambuja Cements and Tata Steel is not going to provide a very different fund portfolio since this not a unique combination. Most diversified equity funds also have large allocations to them. For an existing MF investor, buying a housing thematic fund may translate to taking extra positions to sectors/stocks to which they are already exposed to.