Though the Reserve Bank of India has allowed real estate developers and housing finance companies to raise upto $ 1billion (Rs 5,400 crore) via external commercial borrowings (ECB) route, hedging costs may make unattractive for borrowers.
"It looks very difficult for raising funds through this new window. Monitoring use of funds is going to be a challenge. Also, there is question mark over preparation and ability for managing currency risks even through hedging," said S Srinivasaraghavan, head treasury, Dhanalaxmi Bank. Added Brotin Banerjee, managing director, Tata Housing: "In the short term, it may not be a good option as you can get such rates in NCDs also. Why would one take currency risks and hedging risks if you can raise such loans domestically."
The funds raised through ECBs could be used either for developing low-cost housing projects or for providing loans up to Rs 25 lakh to individuals for buying units with a price tag of Rs 30 lakhs or less, RBI said in a circular on Monday. "Even if you bring ECBs, then cost of that will not be less than domestic debt because of hedging costs. Real estate does not have natural hedging unlike IT where you earn in dollars. But sectors such as real estate, you need to buy dollars to repay loans. In that case, you are exposed to currency fluctuation risks," said Ambar Maheshwari, managing director, corporate finance, Jones Lang LaSalle, a global consultant. According to Maheshwari, if one includes hedging costs, the effective rate comes to 10 to 11%.
ECBs come at Libhor plus 500 to 600 basis points. J Akilan, executive director, BBVA India, European financial group, said first lenders will look at credit risks. Only on being convinced on this count, they will get to pricing aspect for such transactions. The challenge is in managing currency risk as these projects may not have natural hedge sans foreign currency income.
"Though it will lead to more liquidity, there will be restriction on usage of funds, and costs would not be exponentially cheaper. You can not use that money to replace the existing loans too," said Anuj Nangpal, director, investment advisory, DTZ International Property Advisors. But developers say this is move in right direction. "The industry was not able to make full use of the earlier ECB policy as only triple A rated developers could access funding. The revised criteria will ease the financial crunch of the industry and make funding more accessible for developers and Housing Finance Companies (HFCs)," said Brotin Banerjee, managing director of Tata Housing which is developing affordable projects in the country. "Going forward, the limit of $ 1 billion will need to be looked at if we are to overcome the housing shortage of 26 million units.” Banerjee said. Added Ashish Puravankara, deputy managing director, Puravankara Projects: "At this point in time when construction finance comes at 13.5%, if your scale of operations is large, even 3 to 4% advantage is large.. It is a move in right direction," he said. Puravankara is also developing budget housing projects through its arm Provident Housing.