Rates have been the lowest for top developers in the past 10 years, say experts, adding that sourcing loans is still a difficult task for large but overstretched, as well as mid and small developers. The rate for construction financing was down to 9.5 per cent in Q2CY20 from 11-12 per cent a couple of quarters back. It stood at 11.8 per cent in Q2CY19, according to CRE MATRIX.
Lease rent discounting (LRD), in which developers discount their future rent receivables, has also dipped due to lower office leasing, the experts add. LRD rates are now at 8.5 per cent, compared to 9.5 per cent a couple of quarters ago. Rates for other loans, too, have reduced to 9.5 per cent from 10-11 per cent. “There is too much money in the market but very little trust. Banks today doubt most companies’ ability to repay. As a result, they have limited options,” says Vikas Oberoi, chairman of Oberoi Realty. He adds that the company is getting loans at sub-8 per cent, while LRD is even lower.
Kamal Khetan, chairman of Sunteck Realty, says: “…demand is returning to near-normal for developers with a strong track record of delivery and efficient financial management. Hence, they will find favour with lenders.”
CRE Matrix’s co-founder Abhishek Tiwari says rates have dropped because banks have softened the MCLR (marginal cost of funds-based lending rate) and NBFCs have significantly cut rates on fresh real estate exposure. Tiwari adds that LRD remains more attractive than construction financing. Although LRD carries lower risk (as EMIs are pegged with rental receipts from underlying assets), the sequential change in LRD rates was only 20 bps. “We attribute this to the expected dip in office leasing or heightened risk of vacancy in office assets,” he says.
The cover that lenders ask from developers has also seen a rise, since the last few years. It has surged from 1.58x in 2016 to 1.66x in 2020, according to Propstack, a real estate data analytics firm. However, Brigade Enterprises CFO Atul Goyal points out that rates for new construction financing have not substantially reduced, vis-à-vis the cut in rates by the RBI, given that banks are being conservative while lending. “…However, for existing construction financing loans, rates have come down because of the MCLR reduction.”
Brigade’s average cost of borrowing, as of June 30, stood at 9.56 per cent, which was among the lowest compared to peers, he adds. J C Sharma, vice-chairman of Sobha, said only good developers with strong balance sheets were able to raise LRD at low rates. “Our average cost of borrowing as of June 30 was 9.64 per cent, which is likely to fall further,” he says. While loan rates are on the decline, last-mile financing or rescue financing rates are on the rise.
Shapoorji Pallonji Real Estate raised Rs 750 crore from Asia Pragati at 20 per cent, to service its debt.