Mumbai: Indian homebuilders, facing the highest borrowing costs in two years, are enticing homebuyers to help finance projects as they work to revive sales and cut debt.

Developers including Mumbai-based DB Realty Ltd and Sunteck Realty Ltd are offering to make buyers’ mortgage payments while their home is being built in return for an upfront deposit of as much as 30% that they’ll use to help fund construction. Indian mortgage rates, among the highest in Asia at about 10% on average, are still preferable to rates for commercial-bank construction loans, about 15%.

Developers are looking to counter a slowdown in volumes through these schemes, said Bhaskar Chakraborty, a Mumbai- based analyst at brokerage IIFL Ltd. Affordability in Mumbai is the most adverse across major metros, with apartment-sale registrations in the city languishing at a three-year low.

Indian builders are struggling to reduce debt and increase sales with interest rates near a two-year high and prices at a record high in Mumbai, the country’s financial capital. With sales slowing, the financing plans provide an incentive to potential buyers, and immediate cash for builders. The combined debt of India’s six largest developers climbed to a record 37,000 crore ($6.8 billion) in the 12 months through 31 March, more than double the 15,880 crore in 2007, according to data compiled by IIFL.

Possible Tightening

Such financing plans, which tend to stoke demand from property investors rather than those planning to live in the purchased homes, could prompt further tightening measures from the central bank, Chakraborty said. Investors, deferring payments are betting on rising home prices to exit, when the apartment is ready.

The Reserve Bank of India in 2010 asked banks to set aside more money against loans on so-called teaser rates, where buyers get discounted interest rates in the initial years. It also capped housing loans at 80% of the property value, from 90%, as it sought to check rising home prices.

The financing options are being advertised as 20:80 because homebuyers have to pay 20% of the value of the home at the time of purchase, while lenders offer mortgages for a maximum of 80% of the value. Builders agree to pay the mortgage for up to two years, promising completion of the home in that period.

The offer by DB Realty, the worst performer on the National Stock Exchange’s 10-member property index this year, allows buyers to pay 19.9% of the cost when they buy and the rest when the apartment is completed. Sunteck Realty is asking for 30% of the home value upfront.

Mumbai Prices

The stock of unsold homes at new residential projects climbed to a record in the quarter ended 31 December, as rising prices crimped affordability in the nation’s biggest cities, according to Pankaj Kapoor, founder of property research company Liases Foras Real Estate Rating & Research Pvt. Total unsold inventory of residential stock in the six major cities tracked by Liases Foras climbed to 100 million square feet (9.3 million square meters), the highest since 2009.

Home prices in Mumbai, India’s most expensive real estate market, rose to a record high at 11,626 a square foot in the quarter ended 31 March, according to data from Liases Foras.

Construction delays present the biggest risk for homebuyers. If the project isn’t completed within the two years, the buyer will have to start making payments on a home they can’t move into.

For two years, the developer will pay the interest, but the big assumption there is that the project will be completed, said Ambar Maheshwari, managing director of corporate finance at property brokerage Jones Lang LaSalle India. If the project isn’t completed or is delayed, the bank will come after the buyer, not the developer, in the event of a default.

Delayed Projects

Construction delays are rampant in India. Sixty-one percent of developments in eight cities across India are not completed on time, according to data from Liases Foras. Twelve percent are delayed by more than two years, the data showed.

Developers are also raising prices as a tradeoff for paying buyers’ mortgages.

Mumbai-based DB Realty is selling its Orchid Crown condominium project in the city for 26,000 a square foot, while charging 25% more for customers opting for the deferred-payment plan. DB is offering the option for all its projects, with about a quarter of its sales being generated through the plan, said chief executive officer Vipul Bansal.

We are seeing a boost in sales and this scheme is gaining ground because it addresses the concern of delays in project completion, Bansal said in a phone interview from Mumbai. There is a separate charge for this financing. We calculate the interest and add it on to the base rate to factor in the interest costs. Bansal said he wasn’t replacing bank construction loans with mortgages and charges the higher rate to customers to service loans on their behalf.

‘Incentivize Customers’

Sunteck, which is developing residential projects in Bandra Kurla business district in the north of Mumbai, is offering the deferred-payment plan as an incentive for buyers after raising the price of the apartments at its Signia Oceans project in Navi Mumbai, a planned satellite township developed in 1972, about 36 kilometers (22 miles) from the southern tip of Mumbai city. The condominiums will be completed in about six months and the company has enough funding to finish the project, said chairman Kamal Khetan.

Since we have raised the selling price, we are offering this plan to boost sales and incentivize customers, Khetan said in a phone interview from Mumbai, adding that Indian developers typically start offering the so-called 80:20 scheme when they struggle to sell apartments.

We have negligible debt so we don’t need to do this to raise money, he said.

Debt Aversion

Even after the RBI cut funding costs in March for a second time this year to 7.5%, rates are near a two-year high. The central bank, which is scheduled to meet on 3 May, has said lingering inflation reduces the scope for further cuts.

Higher interest rates and a cultural aversion to debt account for India’s relatively low home-loan penetration rates. Home loan debt of $104 billion is equal to 8% of gross domestic product compared with 20% in China and 77% in the US, according to data compiled by Housing Development Finance.

India’s average mortgage rates compare with about 2 percent in Hong Kong, 6.5% in China, and 6% in South Korea, according to Credit Suisse Group AG.

Buying Time

The Wadhwa Group, which has teamed with Hong-Kong based Langham Hotels International to create India’s first airport transit hotel, has secured funding for one of its Mumbai condominium projects by persuading enough buyers to opt for the deferred-payment plan, said chief financial officer Srinivasan Gopalan. In return, Wadhwa assumed liability for their mortgage interest payments for the first two years, he said.

Developers do not get a good interest rate, said Gopalan. By utilizing this payment plan, I save about 300 to 350 basis points—that’s huge. It gives me complete financial closure for the project and I am passing on this benefit to the customers, too.

Lenders including Indiabulls Housing Finance Ltd, Housing Development Finance Corp. and ICICI Bank Ltd are financing such deferred-payment options.

The main advantage is that the 20:80 plan allows customers to better plan their cash flows, Ashwini Kumar Hooda, deputy managing director at Indiabulls Housing Finance, said in an e-mailed response to queries. The disadvantage to customers is that in most cases developers hike the selling rate of homes to factor in the additional burden of bearing interest during construction.

Homebuyer Nilesh Jani is betting that the financing is worth the risk. He bought a 1,500-square-foot, two-and-a-half bedroom apartment in Wadhwa’s Address project in Mumbai for 19.8 million. Jani made the initial 20% down payment on the house and is taking the remaining 80% through a loan from ICICI Bank Ltd.

I know I am paying a higher rate for this financing plan, but it buys me some time, said Jani, 42, who works for a private equity firm in Mumbai. It allows me to defer my payments by two years, and hopefully in that period I will have a higher salary and bonuses to help me make my payments. Bloomberg