Rates for construction finance rise; LRD down as banks turn averse to lend

Construction finance rates are going up for property developers and lease rental discounting rates are falling as banks turn averse to lend for construction activities.

Lease rental discounting (LRD) as the names suggests is a loan pegged against the lease rentals and therefore considered as low risk loan. The rentals act as EMI payment. However construction finance is a function of market dynamics, developer finances, and therefore considered a higher risk product.

Construction finance rates have risen to 12.9 per cent in Q1 of the calender year 2020 from 11.9 per cent last year. Lease rental discounting rates or LRD rates have fallen to 8.7 per cent from 9.7 per cent last year, said a report by CRE Matrix, a real estate data analytics firm.

"With current market conditions wherein housing is not selling well and prices are expected to fall, banks are wary of writing more construction finance loans and expected more interest for working construction finance loans  LRD is emerging as better and safer assets for banks to lend to," said Abhishek Kiran Gupta of CRE Matrix. Developers agree.

"This (construction finance rates rising) clearly means that banks find it risky for themselves to give construction finance. However they have a lot of money and want to deploy this money and it’s safer for them to do an LRD because typically they will only do LRD of companies that are financially solid," said Vikas Oberoi, chairman and managing director at Oberoi Realty.

Raj Menda, chairman of Bengaluru based developer RMZ echoes Oberoi when he says :"Development risk was always higher and with slower sales risk is higher.”

Menda believes that going forward loan rates for rent discounting will go down by 0.25 basis points.

Ramesh Nair, CEO and country head at JLL believes that the construction finance rates should come down as and when the
pricing of risks in CF, which includes development timelines, absorption/sale velocity and so on, becomes easier. "There is also a need for emergence of certainty in issue like ease of labor availability for one to complete construction (if financial assistance is available). All these factors will add on to see that the CF rates should come down," he said.

Hopefully in medium term (2021) these uncertainties with reduce, positively affecting the movement of rates (reduction in CF rates) - but all depends on how this pandemic behaves by then, Nair said.