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Interest costs zoom for real estate developers

Interest costs zoom for real estate developers
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First Published: Wed, Jun 13 2007. 12 11 AM IST
Updated: Wed, Jun 13 2007. 12 11 AM IST
New Delhi: Real estate developers such as Unitech Ltd and Parsvnath Developers Ltd have to pay more for loans because of a ban on overseas borrowings, forcing them to incur the highest interest costs in five years.
The finance ministry’s 18 May ruling will increase Unitech’s funding charges at least five percentage points, managing director Sanjay Chandra said.
Parsvnath was quoted 14% interest on a loan from a state-owned bank, its chief financial officer Ravi S. Pani said.
By curbing overseas loans to developers, the government wants to cool land prices that have as much as tripled in three years and driven the rupee to a nine-year high. Still, higher costs may deter builders from constructing the 10 million housing units a year India is estimated to need by 2030, according to the Asian Development Bank.
“I don’t understand why the government has throttled this avenue and singled out the real estate industry,” said chief financial officer of Delhi-based Eldeco Group, N.K. Ahuja. Eldeco has at least Rs3,500 crore worth of projects. “We were looking at raising funds through this route, but now we’ll end up paying fancy interest rates to domestic lenders,” he said.
Indian builders need loans to buy land, steel and cement as Asia’s fastest wage growth makes it more affordable for the nation’s 1.1 billion people to buy homes. The Reserve Bank of India (RBI), the nation’s central bank, asked banks to curb loans to the real-estate sector, making it harder for developers to obtain cheap financing.
“More than interest rates, the concern for developers is the availability of funds,” Unitech’s Chandra said in an email response to a questionnaire. Unitech was about to complete an overseas loan when the finance ministry changed the rules, he said.
RBI has raised its key overnight lending rate six times in the past one-and-a-half years to slow record bank lending. India’s central bank also raised banks’ reserve requirements thrice since December to curb loans growth.
“Indian banks are not in a position to meet the funding requirements for large projects being undertaken by the bigger developers for various reasons—single borrower limits, high risk weights for real estate lending,” Chandra said.
Indian lenders, including ICICI Bank Ltd and Housing Development Finance Corp., raised rates on home loans, deterring buyers from purchasing smaller properties, DLF Ltd vice-chairman Rajiv Singh had said last month. DLF on Monday started India’s biggest initial public offering, seeking Rs9,625 crore to buy land without incurring much debt. While the government estimates that $320 billion (Rs13 trillion) of investments will be needed to build roads, ports and bridges by 2012, it is curtailing debt flows into the sector to stem gains in the local currency and guard against a property bubble.
Parsvnath plans to borrow Rs2,000 crore over the next two years to buy land and build homes, Pani said. He rejected the Rs200 crore loan offer from the state-run bank because of the high interest rate, he said, without identifying the bank. Overseas rates are lower.
“The rule will force us to compromise on borrowing costs,” Pani said in an interview in New Delhi, where the company is based. “It will also impact us as far as timely generation of the funds is concerned.” Parsvnath plans to raise Rs500 crore in the next three months, Pani said. The company is developing 153 million sq. ft of townships, shopping malls and trade zones in 17 states across India.
Companies want to tap overseas lenders because the benchmark rate for firms borrowing in London is more than three percentage points lower than the comparable rate in India.
The six-month dollar-denominated London interbank offered rate (Libor) is at 5.33%, according to data on Bloomberg. The comparable money market rate in India is 8.75%.
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First Published: Wed, Jun 13 2007. 12 11 AM IST
More Topics: Money Matters | Real Estate |