NEW DELHI: Once bitten twice shy seems to be the mantra for real estate investors these days. After having burnt their fingers during the market slowdown, housing finance companies and private equity investors are asking for almost double the collateral of up to 4 times the deal value to safeguard their investments.
The amount of collateral an investor asks for depends upon the quality of the developer, the strength of his balance sheet, interest and principal service ability and the stage of projects.
Over the last few years, with several developers defaulting on interest payments on account of a liquidity crunch acerbated by falling home sales, investors have become extra cautious.
Almost 25% of the builders with low credit ratings, delayed projects, incomplete buildings and loan defaults are facing similar problems, estimates Sam Chopra, chairman of real estate brokerage firm RE/MAX India. "The collateral can vary up to 3-4 times these days as lenders are keeping a safety margin of around 75-80% in a deal," he said.
This is how the entire collateral game works: For instance, if a builder approaches a lender for a Rs 20 crore loan, the lender will first value the product at the current market rate after evaluating their balance sheets and track record. Now, the collateral will be fixed depending on the credibility of the developer. So, a 3x collateral will be around Rs 60 crore worth of assets as a cover for the deal.
"In a few cases where the developer has limited history and higher risks are attached to project completion and debt servicing, the collateral required is in excess of 2x," said Shobhit Agarwal, managing director - capital markets at JLL India.
Lenders are very cautious these days when giving funds, said Chintan Patel, partner, transactions & restructuring, real estate & hospitality at KPMG India.
"Since the market has softened, I guess the collateral that was given a year back might seem more now. Lenders might get a better cover in a deal with a developer with bad track record, but I don't think funds are ready to take that kind of risk these days," Patel added.
In the early days of foreign direct investment in India in 2006-07, funds invested in anything because the market was good, but the approach has changed now and caution is key. Earlier lenders went majorly for equity deals at the entity level but now investors seem to favour debt deals or a mixed of equity and debt.
"Funds are also keeping collateral as a mix of apartment stock and debt these days," Patel informs.
However, Anil Kothuri, president - housing finance at Edelweiss, thinks pricing is the most important negotiating factor in a real estate financing deal.
"If the customer is little short of credit worthiness, either the lender will not give him the loan at all or will tend to negotiate better pricing than multiplying the collateral," he added.