Fund flows into housing space

High inventory levels spoil the party for retail, commercial space

Fund flows to the real estate sector is more in the residential segment than in the retail and commercial space. This indicates a half-baked recovery for the industry than a complete turnaround.

“As a matter of strategy, bankers are not bullish on the commercial segment of the real estate industry due to higher surpluses in the segment. Today, it is perceived as a high risk exposure due to the slow pick up for leased out property,” H S Upendra Kamath, executive director, Canara Bank said.

Canara Bank, which has less than Rs 2,500 crore exposure to the commercial real estate sector, has funded most of the projects in the residential space, he added.

He also said that as demand was sound in the residential space with a good advance flow in the housing loan segment, banks were more willing to lend to this vertical.

A top executive of a housing finance company echoed similar sentiments.

“As inventory level is high in commercial space and retailers are yet to be back on expansion mode, lending to these segments has a risk factor attached to it,” he said.

According to property monitor DTZ research data, Bangalore developed around 11 million sq ft of commercial space in 2009 but absorption was just 4 million sq ft which is 60 per cent lower than in 2008.

DTZ predicts vacancy levels across six major cities are likely to rise during the first half of 2010 and is expected to stabilise in the second half of the calender year.

Also, as per ‘India Organised Retail Market’, a report based on a seven-city study by property advisory Knight Frank India Pvt Ltd, space in the retail space is expected to touch 21 million sq ft in the next two years.

“Loans for new office space and retail have become more expensive over the last 18 months and has resulted in a drag on the flow of funds to the verticals,” Goutam Chakra-borty, regional director, Colliers International.

Looking at the high inventory levels, both in commercial and retail space, even private equity funds are taking a safe bet in residential segment.

“With quick returns and better yield on investment, most PE funds are putting their money in residential space than in commercial or retail segment,”S Baaskaran, chief financial officer of Bangalore based Sobha Developers said.

PE funds, which eye a return of 25-30 per cent on their investments, don’t want to invest in commercial space due to the long gestation period, he added.

Referring to a change in the pattern of fund flows in future, he said, “Fund flows will be more to the residential segment in near term without any possible indication of change in the long term for the commercial and retail verticals.”

However, some of the developers have a different opinion on this issue.

“Lenders are selective about funding not from the vertical point of view but as per prospects of a specific project. So, there is no specific pattern of funding to any of the verticals of the real estate sector,” Anil Kumar, chief financial officer of Bangalore based Mantri Developers said.

He also said that developers with sound lease rental securitisation deals were attracting enough funding from institutional lenders.