Builders face double whammy as loans slow amid sales slump
Expansion in lending for commercial real estate slowed to 8.9% in the 12 months
May 26, 2015
Source :


Mumbai/Singapore: Indian builders struggling to sell homes amid mounting debt face a new hurdle: reluctant bankers.
“There’s a lot of demand from builders and commercial real estate developers for loans,” Ranjan Dhawan, Bank of Baroda’s Mumbai-based chief executive officer (CEO), said in a 11 May interview. “There’s a limit to how many builders we can finance. The current economic scenario has made us very cautious.”
Expansion in lending for commercial real estate slowed to 8.9% in the 12 months through 20 March, from 22.4% a year earlier, central bank data show. Home sales in India’s top six property markets fell 8% last quarter from a year earlier, according to research firm Liases Foras, which estimates it will take 46 months to find buyers for unsold homes in Mumbai alone.
Some of India’s largest developers have seen debt surge more than 60% as mortgage rates around 10% deter buyers of their new apartment projects. Three out of India’s five-biggest banks reported an increase in bad loans for the year ended 31 March as policy makers’ efforts to boost investment and economic growth have yet to bear fruit.
Slowing inflation
Banks are also becoming more cautious about financing apartment purchases amid a slowdown in house-price inflation, the central bank said in a report on 7 May, noting that lenders are bringing down the loan-to-value ratio for mortgages. The ratio represents the percentage value of an apartment that the bank may lend to customers.
Loans outstanding at Indian banks to developers stood at Rs.1.7 trillion, Reserve Bank of India (RBI) data show.
The All-India Residential Property Price Index, which tracks real estate prices in 13 cities, increased less than 4% in the December quarter from the previous year, the lowest since the June quarter of 2011, according to the RBI. The pace of annual gains peaked at 28% in the three months to 31 December 2012. House prices in Mumbai fell by more than 3% in the December quarter from the year before.
Rising debt
Debt at Godrej Properties Ltd climbed 63% to Rs.2,764 crore in the quarter ended 31 March from a year earlier, while DLF Ltd, India’s largest developer, had a 7.7% increase in its net debt to Rs.20,970 crore.
Sales will take at least 12 months to begin improving with the turnaround expected when interest rates move lower and the economy picks up, DLF said in a statement 20 May. DLF said it was in talks with a few private-equity firms to sell some projects.
The one-year government bond yield reached the lowest in almost two years last week, at 7.80%, as pressure mounted on the RBI to cut rates. It may be reluctant to ease as the rupee dropped 1.6% this quarter and traded at 63.52 per dollar.
More developers are opting for funds from private-equity firms and finance companies as banks pull back.
Piramal Fund Management invested Rs.1,200 crore in an Omkar Realtors and Developers Pvt. project in Mumbai while Bangalore-based Ozone Group received Rs.575 crore from Piramal for a township project.
‘Tough time’
Private-equity property funds disclosed 64 investments last year in India, of which 54 had a value of $2 billion, according to data from Venture Intelligence. The number of transactions was 14% higher than the 56 investments with 52 disclosed deals valued at $1.86 billion in 2013.
“The banking sector is going through a tough time with rising non-performing assets,” said Mumbai-based Gaurav Gupta, director at Omkar. “Construction finance is available for quality developers, but it’s scarce.”
Stressed assets in the banking system will rise to 13% of total advances by March, according to India Ratings and Research Pvt. The ratio was 10.73% as of December, central bank data show.
The cost of capital at non-bank finance companies can be as high as 24% for some developers, N.M. Gattu, chief financial officer at DB Realty Ltd, said in an interview in April.
Unsold homes in Mumbai totaled 192.3 million square feet in the quarter ended March, which will take 46 months to be sold at the current pace, according to Liases Foras. A healthy market maintains between eight and 12 months of inventory.
“The risk aversion of lenders has gone up,” Vibha Batra, the New Delhi-based co-head of financial-industry ratings at ICRA Ltd, said. “Demand in the property market has been slowing in the last two to three years, so banks are not aggressive lenders in that segment.”

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