With liquidity from traditional channels like banks and equity markets drying up for property developers, non-banking finance companies (NBFCs) have raised rates for loans to real estate companies by two-three percentage points (200-300 basis points).
The rates have gone up from 15-19 per cent to 17-22 per cent. The rates vary according to the developer, the project and the requirement of the company, say NBFCs and consultants. Normally, NBFCs charge three-five percentage points more than commercial banks.
“Our own cost of borrowing has risen to 14 per cent,” said an executive with an NBFC.
A senior analyst with a public-sector bond house said the cost of funds for companies, including NBFCs, had gone up, reflecting the severe strain on resources. The three-month commercial paper was priced at 7.5 per cent in October. Fresh issuances would now be done at 9.5 per cent and above. As of now, the rates look stable. But, they may rise in line with the heightened demand in the last quarter. The Reserve Bank of India’s (RBI’s) policy would also have a bearing on rates.
A senior executive with Edelweiss Capital said the rates had hardened due to the severe liquidity crunch and the risks associated with the sector. “The sector is seen as a high-risk one. As a prudent step, NBFCs are seeking additional collaterals. For instance, for a loan of Rs 150 crore, the collateral sought is at least 2.5 times the loan’s value,” he said.
“It all depends on the project and the developer who is borrowing,’’ said Harshad Apte, vice president, IIFL, a financial services firm.
Indiabulls, Religare, Edelweiss, IIFL, Reliance Capital, IL&FS and IDFC are active in providing finance to construction and real estate companies.
Public sector banks, a major source of funds for developers, have been tightening funding to developers after RBI increased the risk weight on loans extended to commercial real estate. RBI also asked banks to be more vigilant in lending to the sector.
“PSU banks are becoming indecisive and taking time to clear loans, this is more due to the tightening in liquidity and general perception surrounding real estate as an asset class,’’ N Shridhar, director, strategy and finance, DB Group, a Mumbai-based developer, told this newspaper last month.
The recent ‘bribe-for-loan’ scam in which senior officials of LIC Housing Finance and some banks were arrested had made matters worse, said developers.
“The borrowings from NBFCs have gone up sharply in the last few months as banks have tightened lending,” says Ramashraya Yadav, head of finance at Orbit Corporation, a Mumbai-based property developer. However, Orbit had not taken any loan from NBFCs recently, he added.
“Developers do not have an option as home sales are declining and the equity route is becoming difficult to tap,’’ says Amit Goenka, national director, capital transactions, Knight Frank, an international property consultant.
Home sales in Mumbai have dropped to half compared to the beginning of 2010 as property prices in key areas have risen 40-45 per cent. Developers’ initial public issue (IPO) plans have also been hit by poor investor sentiment.
According to Prime Database, which tracks primary capital markets, eight real estate companies have got the final approval to launch IPOs. These include Raheja Universal, Lodha Developers, Lavasa Corporation and Kumar Urban Development. Together, they want to raise Rs 9,500 crore.
However, developers need cash to complete their projects and repay debt. According to an earlier RBI estimate, property developers have piled up a debt of Rs 75,000 crore and have to repay Rs 25,000 crore before March 31.
Realtors are also borrowing from portfolio management services (PMS) companies such as ICICI Prudential PMS and HDFC PMS at 25-27 per cent on a pre-tax basis, which includes a fixed coupon rate, a premium and a fee.
“Today, we are certainly charging higher than earlier,’’ said a senior fund manager with a PMS firm.