Affordable Housing Finance Sector Faces Challenges, Elara Capital Reports
Elara Capital highlights scale challenges and intensifying competition in the affordable housing finance sector, projecting a decline in return on equity and advising a selective investment approach.
Affordable HousingFinance SectorElara CapitalInvestmentStock PerformanceReal Estate NewsAug 22, 2025
Elara has initiated coverage on Aptus Value Housing Finance with a 'Buy' rating and assigned 'Accumulate' ratings to Aadhar Housing Finance, India Shelter Finance, and Home First Finance. Additionally, it has upgraded Aavas Financiers to 'Accumulate' from 'Reduce', citing improved risk-reward dynamics.
The brokerage projects return on equity (ROE) to decline to 15-16 per cent during FY25-28 from 18-20 per cent in FY21-24 (excluding Aptus), reflecting scalability challenges and rising operational costs.
Year-to-date, most AHFC stocks have outperformed broader markets. Aadhar Housing Finance gained 23 per cent, Aptus rose 22 per cent, India Shelter surged 28 per cent, and Home First Finance climbed 25 per cent. However, Aavas Financiers slipped 1.3 per cent. In comparison, the Nifty Realty index fell 12 per cent, while the Nifty50 rose 5 per cent.
AHFCs delivered 35-45 per cent asset under management (AUM) growth during FY15-24, driven by rural market penetration, technology enhancements, and workforce expansion. However, this growth is forecasted to moderate, with loan growth expected to be around 20 per cent during FY25-28.
The brokerage analysis suggests that companies with loan books exceeding ₹20,000 crore, such as Aadhar Housing Finance and Aavas Financiers, are adapting their business models. The scaled-up phase is characterized by increased competition, enhanced productivity requirements, and higher attrition and provisions. Strategic geographic expansion and productivity improvements can help overcome these challenges, with Aptus and Home First Finance expected to lead the pack due to their expanding footprints and superior productivity metrics.
Analysts anticipate that scaling challenges will likely impact operational metrics. The operating expense-to-assets ratio is projected to increase from 2.8 per cent during the high-growth phase of FY21-24 to over 3 per cent during the steady growth phase of FY25-28. This operational efficiency decline stems from the high operating expense model, which poses scalability problems and limits pricing flexibility for AHFCs. To offset these cost pressures, companies will need hybrid models that blend technology with human interaction, coupled with in-house customer acquisition strategies. Aptus and Home First Finance Company are well-positioned, according to Elara Capital, but sustainability amid evolving market dynamics bears watching.
As the sector focuses on maintaining high growth through elevated leverage, along with dissipating operating leverage benefits and increased competition, AHFC margins are expected to stabilize during FY26-27E. Margin improvement stemming from the yield-cost interplay can be achieved through careful assessment of business mix shifts and ratings revision. Niche business models, such as Aptus (100 per cent NBFC subsidiary structure) and India Shelter (higher share of loan against property), may continue to witness net interest margin (NIM) upticks.
With an increase in scale, housing finance companies face the risk of elevated operating expenses and Stage 2 movement. Stage 2 are loans where there has been a significant increase in credit risk; they are not yet in default but show signs of deterioration. The high growth phase of FY21-24, led by new geographic forays, product portfolio expansion, and rising ticket sizes, saw a Stage 2 spike of 10-20 basis points (bps) and credit cost 8-10 bps. Elara expects the next phase, characterized by regional and structural headwinds, to see Stage 2 surge to 3 per cent in FY25-28E from 2.5 per cent in FY21-24. It anticipates a two-year lag in non-performing assets (NPA), with credit cost rising 5 bps and over 10 bps, respectively, in FY26-28E. Among sector players, Home First Finance is considered best positioned to navigate these asset quality challenges.
Frequently Asked Questions
What is the main concern for the affordable housing finance sector according to Elara Capital?
Elara Capital is concerned about scale-related challenges and intensifying competition, which are expected to moderate growth and impact operational metrics.
Which companies have been given 'Accumulate' ratings by Elara Capital?
Elara Capital has assigned 'Accumulate' ratings to Aadhar Housing Finance, India Shelter Finance, and Home First Finance.
What is the projected decline in return on equity (ROE) for the affordable housing finance sector?
Elara Capital projects ROE to decline to 15-16 per cent during FY25-28 from 18-20 per cent in FY21-24.
How have AHFC stocks performed year-to-date compared to broader markets?
Most AHFC stocks have outperformed broader markets, with significant gains for companies like Aadhar Housing Finance, Aptus, India Shelter, and Home First Finance, while the Nifty Realty index fell 12 per cent.
What are the key strategies to overcome scaling challenges in the affordable housing finance sector?
Strategic geographic expansion, productivity improvements, and hybrid models that blend technology with human interaction are key strategies to overcome scaling challenges.
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