Realty check for real estate developers

Realty check for real estate developers

New Delhi: As the Indian economy faces a liquidity crisis, banks remain wary of lending money to the real estate sector. The developers, facing deadline pressures for delivery of projects, are forced to tap private money lending sources. Consequently, they have been forced to borrow money at steep rates.

According to Sanjay Khanna, managing director of Kailash Nath Associates, this rate could be as high as 5% per month. A rate of 5% interest per month translates to a whopping 60% per annum. It means that a developer will have to pay Rs6000 for every Rs10,000 it raises. Builders do not have the money to construct and have approaching delivery deadlines. Real estate experts fear that some builders may even default.

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b53b979a-a35a-11dd-b198-000b5dabf613.flvSanthosh Kumar, deputy CEO of property consultants and brokers Jones LaSalle Meghraj agrees with Khanna but says that players with better fundamentals may still find money at 15-20% rate of interest. “But others may have to pay upwards of 30% as well," he says.

As demand slows, the price of residential and commercial real estate in the country has been sliding. It has fallen by 15-20% across metros over the past nine to twelve months and is expected to fall by another 30-40% over the next few months. In such a scenario, developers who went aggressive on land acquisitions, based on the presumption that prices will continue to rise, find themselves in a tight spot. They are now forced to borrow money from the market at unsustainable rates.

Ashish Mathur, Head-Business development and marketing for Mahindra World City says, that some small developers may have to exit the business all together if the market does not pick up soon.

The problem is worsened by a slowing economy and over supply of office space and it’s slow off take as reported by real estate consultants Cushman & Wakefield and CB Richard Ellis among others. Expensive home loans have turned away the residential buyers as well. Almost 90% buyers use bank finance for home purchases. Santhosh Kumar says that developers are expected to cut prices by 30-50% or more to boost offtake in the coming months. He warns, there may even be distress sales by developers.

The bad news for realtors extends to the stock markets as well. The BSE realty index fell 24% on Friday on worries that the real estate sector is heavily leveraged. As the economy slows down and money gets dearer, the pain is only expected to get worse for real estate developers.