Mumbai/Bangalore: Indian real estate developers facing a severe shortage of funds are approaching private lenders, including HNIs (high networth individuals), and borrowing money at interest rates as high as 36-40%.
Such behaviour was last seen in 2008-09 during the liquidity crunch in the wake of the global economic crisis.
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Analysts and executives in the business say the trend has re-emerged in recent months, with the money being used to fund ongoing projects or repay bank loans. They are raising these loans against the guarantee of certificates of allotment to prospective buyers, land or property titles, or other collateral.
Bank lending has slowed after a November revelation of a bribes-for-loans scam involving realtors, banks and a well-connected intermediary.
Property prices remain high, and many prospective buyers are waiting for them to fall. The developers themselves are loath to reduce prices, so sales are slow.
“Builders are raising money at 32-36% from private lenders as there are no funds available from banks. This level of dependency has started only in the recent months and possibly the first time in the last three years,” said Arun Kumar Kedia, director of Mumbai-based developer Garnet Construction Ltd. “As of today, banks are not willing to lend and there is no private equity money coming. That leaves a lot of room for private people (lenders).”
A real estate consultant paints a grim picture. “The cost of borrowing has been spiralling. Short-term money from private investors, HNIs or bridge financiers is at a high of 3-4% a month, while long-term borrowing from institutions is at 20-22%,” said Amit Goenka, national director (capital transactions) at Knight Frank India Pvt. Ltd, a property advisory.
The Knight Frank and Anand Rathi Financial Services Ltd rental yield fund is planning to raise Rs 400 crore this year from HNIs, family office trusts and pension groups, said Goenka. It has already raised Rs 220 crore in the first round.
Most of the developers and analysts Mint spoke with said companies are seeking private money from wealthy individuals, diamond merchants, jewellery makers and family offices looking to deploy their money in high-yielding transactions to secure bridge finance to tide over the current cash crunch.
Rajesh Mehta, chairman of Bangalore-based jewellery maker Rajesh Exports Ltd, who does some private lending, said he is seeing a lot of demand from real estate developers largely to complete projects and to launch those that they can’t start on their own. Mehta added that the demand for such loans is almost as high as it was in 2008-09.
“Builders wouldn’t agree to pay extra and higher interest rates if they were not in need, considering that banks are not lending and sales are not happening,” he said.
The phenomenon itself isn’t new. Traditionally, moneylenders, especially from certain communities such as the Marwaris and Chettiars have been active in the business of lending to developers (and to other entrepreneurs). Such lending gained prominence in the mid-1990s when the cost of money rose, following a tight monetary policy.
Such loans are either partly or completely unsecured, said Goenka of Knight Frank. When secured, the collateral is usually a title deed, land or buildings.
Real estate developers get money from commercial banks to finance projects at 12-14% and at around 18-20% from non-banking financial companies (NBFCs). Such funds are given to dedicated special purpose vehicles set up by developers for specific projects. About 30-35% of the funds a developer needs typically come from commercial banks.
This has changed since November after the bribes-for-loan scam; the Central Bureau of Investigation arrested several officials from banks and financial services firms for allegedly accepting bribes from middlemen to sanction loans or share confidential information.
A sharp slowdown in sales has also squeezed the cash flow of real estate players, said analysts, blaming developer cartels for the current situation.
According to a Nomura Financial Advisory and Securities (India) Pvt. Ltd report, between January and June, 29,684 property purchase agreements were registered in Mumbai, a fall of 20% year-on-year (y-o-y).
“There are cartels operating in Mumbai that have jacked up the prices and do not want to bring it down now,” said a senior analyst with a Mumbai-based real estate consultancy, who did not want to be identified. “A 20-25% correction in property prices, which should have happened by now, has the potential to push sales.”
The slow sales are also a factor in the reluctance of banks to lend to developers, said a banker.
“Developers are not getting buyers. If they reduce the prices, it will compensate the prospective buyers. But it is not happening. As a result banks are not comfortable about lending (to them),” said a general manager in charge of corporate loans at a state-run bank.
“If the prices are not reduced by Diwali and sales do not pick up, things can turn difficult,” added the banker, who did not want to be identified.
Sunil Mantri, chairman of Sunil Mantri Realty Ltd, said NBFCs and private funds are lending at 20-30% while “some other private investors are lending at 20-40%”. Mantri said his firm has borrowed from private investors at about 18-21% and from banks at 15-16%.
Sanjay Dutt, chief executive (business) at Jones Lang LaSalle India, a property advisory, said the dependence on HNIs is high in the current scenario and some of the ultra-HNIs are investing as much as Rs 30-50 crore each.
According to a 21 June CLSA Asia-Pacific Markets report, credit by scheduled commercial banks to the real estate sector grew 21% y-o-y to Rs 1.1 trillion as of 25 March.