HDFC rolls out US$ 1 bn fund to bankroll affordable homes

India's burgeoning demand for affordable homes is now attracting the attention of major players in the housing sector. The latest entrant to enter this category of projects is the country's leading mortgage lender HDFC, which has announced the launch of a US$ 1 bn offshore fund, set up to finance projects in the affordable homes segment.

According to informed sources, the fund which also marks the launch of HDFC's ninth business vertical, has already secured its first close of approx US$500 mn with a large chunk sourced from the Gulf-based Sovereign Wealth fund.

They further add that the Abu Dhabi Investment Authority (ADIA), the world's second-largest sovereign wealth fund, has also evinced keen interest in the future potential of affordable homes in the country and is one of the major investors in the fund in addition to two other European pension funds who have also joined the list of investors.

The fund formed with the objective of investing in affordable housing projects pan-India is also expected to reduce the severe shortage of equity capital in the affordable housing space. In terms of the project selection criteria, the fund will follow the RBI stipulations which state that the cost of an affordable home should not exceed INR 65 lakhs (in metros) and INR 50 lakhs in non-metro cities.

According to industry experts, with land acquisition costs and raw materials prices on the increase, the construction of affordable housing has become a difficult proposition for cash-strapped developers. They further add that although the affordable housing segment is witnessing a lot of demand from strategic investors, there are few options presently mainly due to high land costs, making it unaffordable for a majority of developers.

On the flip side however the country needs approx 7 mn homes every year, with about 75 percent of this demand generated by the affordable homes segment alone. Experts add that this mandates a land requirement of approx 3 lakh acres, if the demand for affordable homes is to be catered in full.

Keeping this scenario in mind, HDFC is expected to buy land parcels on the outskirts of the city, in addition to joining hands with developers to ensure profitability. If a proper cost structure is maintained, experts predict that the fund could generate returns to the tune of approx 20-25 percent.

While the first tranche of the fund is expected to be deployed over the next three months, sources reveal that fund raising efforts for the second tranche have already commenced in the overseas market.

Interestingly this is not the first time that the Abu Dhabi-based ADIA has joined hands with HDFC, one of its most preferred onshore investment advisors for its India-related investments. HDFC Asset Management, its mutual fund subsidiary is also said to be advising the US$ 800 bn SWF on its India-specific investments.

Established in 1976 with the objective of investing funds on behalf of the Government of Abu Dhabi with a focus on long-term value creation, ADIA manages a global investment portfolio that is diversified across more than two dozen asset classes and sub-categories.

As per ETIG data, ADIA has investments to the tune of INR 19,000 cr in Indian stocks spanning several large and mid-cap companies like Infosys, L&T, HDFC, Dr Reddy's Labs and Reliance Industries.

Similarly HDFC also enjoys close ties with other major SWF's like Temasek, owned by the government of Singapore and the Oman-based State General Reserve fund, though it's unclear whether either of them is likely to invest in the second tranche of HDFC's new affordable housing fund.