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Liquidity crunch, demand slump lead to desperate borrowing

Liquidity crunch, demand slump lead to desperate borrowing
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First Published: Wed, Jun 27 2007. 12 09 AM IST
Updated: Wed, Jun 27 2007. 12 09 AM IST
In Chandni Chowk’s narrow congested lanes that sell everything from silver jewellery to oily paranthas, talk is, a new clientele may be emerging. In the old, narrow lanes with crumbling buildings jostling for air and space—money lenders, who sit in spaces not larger than a dinner table, are lending money to real estate developers—borrowing to build and sell swank office towers and wide-laned gated communities.
Lenders, who refused to be identified, claim to have lent money to builders, crippled by a Reserve Bank of India (RBI) diktat to banks that has effectively slowed loans to developers already hurting from large borrowings, bloated interest payments and a slowing market for real estate. The interest charged by these lenders is at 30-35%.
“I know such things are happening here. It’s a bad time for builders,” D.P. Kohli Siddharth, proprietor of Siddharth Land & Finance, a property dealer in the same area, says. “They are getting black money. But I am not involved in all this,” he hastens to add. Black money is a reference to wealth that has not been declared as earnings and has escaped the tax net.
With banks reluctant to lend to builders, market grapevine that builders are borrowing from private lenders refuses to go away.
“Yes, there is a strong market rumour that developers are borrowing at 35-36% rates,” says Nitin Gupta, an analyst with PricewaterhouseCoopers. “Even some of the well-known developers are apparently borrowing at 25-30% interest rates. The amounts they borrow are very less. But that is the only recourse some players have,” Gupta said.
Parsvnath Developers Ltd declined to comment when asked whether the company was borrowing at such rates from private lenders. Ansal API Ltd has denied that it has approached lenders for money.
“We are flush with funds we raised from qualified institutional buyers,’’ says Kunal Banerji, vice-president, marketing and communications, Ansal API.
Traditional sources of funds have almost evaporated, thanks to a slew of measures announced by the government to cool the market. In the past year, RBI has increased its key lending rate several times. The central bank has also doubled the provisioning requirements on loans to the real estate sector from 1% to 2%. For each loan of Rs100 crore that a bank disburses to a realtor, the bank will have to set aside Rs2 crore as a provision. Due to this, banks are forced to charge higher interest rates on loans. They are also getting very selective about whom they lend to, and how much.
“Money is not as easily available now,” Kaushik Sengupta, vice-president of Eros Group, said. Eros claims it is not one of those hit by the credit crunch. Developers have turned to the grey market for funds to pay for their land purchases and existing projects, developers and analysts said. Loans, even from commercial banks, have become very expensive for developers. Interest rate on project finance has increased from 11.5% in September ’06, 12.75% in March ’07 to 13% in June ’07.
“Our cost of borrowing has gone up from 9% to 12.5% in the last six months,” Susheel Vats, company spokesperson of M-tech Developers, said.
“With higher provision required for lending to the real estate sector, the cost of capital has gone up for the banks,” K. Ravishankar, chief financial officer of DivyaSree Developers, a Bangalore-based real estate company, said.
Credit tap dries
Also, banks are now more wary of lending to the real estate market. Sunil Rohokale, head, mortgage finance, ICICI Bank Ltd, says cautious lending is not new.
“Banks have always lent to real estate developers on a selective basis and continue to do so.”
The real estate boom in India gathered pace in early 2005 after the government relaxed foreign direct investment (FDI) norms in the construction industry to revamp India’s crumbling infrastructure and fill a gap in the supply of homes. That stoked an unprecedented interest in the property market, making it one of the most sought after investment destinations in Asia.
In the last 12-18 months, land prices have risen by almost 30% to 100%, varying from city to city, with the top metros leading the growth. Many small developers made large profits by building commercial space and providing housing in smaller cities and towns across the country. Large real estate companies also saw their profits zoom as they profitably developed land they had bought many years ago in a depressed market.
But now, some of that has changed. Buoyed by rising prices, developers have rushed to grab land—some at prices that far exceed levels that potential clients can afford. As lending rates soar, buyers, who once lapped up developments almost as soon as they were announced, are now holding back to see if there will be a drop in prices.
There has been a 50% drop in real estate transactions over the last two months, say developers and analysts. Property developers have dropped rates in some areas. In the National Capital Region, Mumbai and Bangalore, prices have slumped by 10-20%.
“Some correction is expected in the last quarter of the current year, especially in some areas which has witnessed large price increase,” Thirumal Govindraj, Chennai head of CB Richard Ellis, said. “With interest rate going up and in addition supply increasing, the prices are expected to decline over the next nine months,” said Govindraj.
A fall in the demand for residential property, coupled with a credit crunch, has severely impacted small local developers. Most of them might have to close shop, says Sengupta.
Local developers in tier-II and tier-III cities are also facing stiff competition from large players such as DLF Ltd, and the K. Raheja Group, who are expanding beyond their traditional markets of Delhi and Mumbai.
Collaborative efforts
Arvind Parekh, chief financial officer of Omaxe Ltd, thinks the only way out for small developers is to sell out or go into collaborations with other developers. He points out Crossings Infrastructure—a consortium of seven builders in Delhi and NCR, including Gaursons Builders—as an example of this.
Crossings Infrastructure is establishing a tower town ‘Crossings Republik’, with an investment of Rs3,000 crore, in Ghaziabad.
But Indira Sharma, vice-president (marketing) of the Bangalore-based Brigade Group, thinks it is unlikely that there will be developer consortiums as there are too many complications in doing this. Instead, funding may come from a consortium of investors. “Most of the FDI-compliant projects might take the private equity route,” she added.
Developers have already been forced to sell equity to high net worth individuals (HNIs) after the government barred the raising of money overseas through debt.
“If you are a small-time builder and have not tied up your project finance, there are few options today except to go for the expensive equity route,” Vicki Oberoi, a Mumbai-based developer whose firm Oberoi Constructions recently received a $150 million equity infusion from Morgan Stanley, said.
The government’s moves may have sucked out the liquidity from the system, “but there is plenty of equity chasing developers who have the right kind of asset mix and are not over-leveraged,” Shobhit Agarwal, head of investments at Jones Lang Lasalle Meghraj, a Mumbai-based real estate investment advisory firm, said.
Some developers, such as Pradip Kumar Chopra, director of the Kolkata-based developer PS Group, say that they are not really feeling the pinch of funds drying up.
“The developers made good these past five years and are in good financial strength,” he says, adding, “True, bank credit has become costlier, but this is not hurting realtors’ pockets yet.”
Sanchita Das in Kolkata, Gayatri Ramanathan in Mumbai and John Samuel Raja D. in Chennai contributed to this story.
This is the second in a three-part series on the impact of a softening real estate market. The first part appeared on 26 June.
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First Published: Wed, Jun 27 2007. 12 09 AM IST
More Topics: Money Matters | Real Estate |