Vault matters. Whither affordable housing finance?

The fortnight gone by saw two interesting transactions in the affordable housing market. The first was the much-awaited listing of one of the largest affordable housing finance companies backed by a marquee private equity investor and the other was an equally high-profile private equity investor buying out an affordable housing company from a leading non-bank. 

Shares of Aadhar Housing hit the market last Wednesday and, just like we’ve seen in recent IPOs, there was no listing gains here as well. This despite the IPO being priced affordably at 2.2x FY25 estimated book value and backed by Blackstone, which helped in turning around the business and putting it firmly on the map. In fact, barring Aavas Financiers, the nearest competitor for Aadhar in terms of business size, most of the listed affordable housing finance companies have seen subdued performance on the Street lately. 

Meanwhile, a few days ago, Shriram Housing Finance was sold to Warburg Pincus for ₹4,630 crore, reportedly making it one of the largest transactions in the affordable housing finance market. Ironically, the deal closed at less than 2.3x FY25 estimated book — making it one of the lowest valuations the sector has seen since 2020. To rewind in time, 2023’s Bain–Adani Capital deal was struck at valuations higher than 3.5x price-to-book and so was the TPG–Poonawalla Housing Finance deal. What then is going wrong with valuations? 

‘Next growth engine’

The affordable housing wave gathered momentum in 2016 following a slew of favourable reforms, including tax sops rolled out by the government. But that soon petered out within two years. Private equity investment soon began chasing the sector, with Blackstone–Aadhar Housing being 2019’s largest transaction in the space. 

It was also the time when prime housing was saturating and many saw opportunities in affordable housing as the next growth engine. 

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Simultaneously this was the start of a massive fragmentation in the industry, very similar to what we see in the microfinance space. Now, consider this: the total size of the housing finance market is over ₹27 lakh crore, of which the share of affordable housing may be 10–11 per cent. In the pre-HDFC Ltd days, it was about 6 per cent. If one were to consider the entire financial services landscape, the share of affordable housing finance may be far more microscopic. Yet, the market is shared by 4,938 players, according to data from Tracxn, making it even more fragmented than the microfinance sector. 

Matter of size

Now comes the question of scale. 

A majority of players, including the well-established ones, have ₹4,000–10,000 crore worth assets under management. Barring Aadhar and Aavas, few can claim scale. However, at an AUM of ₹20,000 crore and above, companies have to decide whether they can remain an affordable housing player or look at prime and super-prime mortgages, which have very different dynamics. Like microfinance loans, affordable housing is also becoming a key ingredient of priority sector lending for banks. Many banks have scaled up this business since 2020 as it doesn’t consume capital, owing to favourable risk weights, and it’s a high-yielding one. So, 2-3 years on, what will fuel growth for pure-play affordable housing finance companies, and can they garner a larger share of the pie? More importantly, will they be able to stand up against the big boys, aka banks?

With the answers remaining unclear at the moment, the recent deals may be indicative of prolonged subdued valuations for the sector. How then would PEs invested in these companies get their exits? An interesting wait-and-watch game unfolds.