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Realtors fear delays as funds go scarce
The New Indian Express  |  March 6, 2019

Anuradha Shukla Express News Service

As if drying funds from pre-launches were not enough, the IL&FS crisis has created a major funding problem for developers who are now struggling to secure funding with interest costs having risen as high as 24 per cent.


“The liquidity crisis is a matter of great concern for the sector. Funding for realtors from non-banking financial companies (NBFC) have become scarce after the IL&FS crisis. We have presented our demands to the governor of RBI and requested them to infuse more liquidity in the system,” Niranjan Hiranandani, President, NAREDCO said.


Developers point out that earlier, many projects saw funds raised from customers with pre-launches, which helped them to fund the construction partially. The number of flats sold during these pre-launches were also helpful in securing bank loans for the projects.


“Post GST, however, pre-launches have become a non-event and... banks are lending on the basis of number of flats they have sold. The developers are now forced to borrow heavily from NBFCs at very high rates and post IL&FS, that is also becoming scarce,” Hiranandani added.


The industry claims that their borrowing costs have gone up by 2-3 per cent.“As the real estate sector does not have industry status yet, lending rate is not uniform&hellip as developers rely on non-banking financial institutions. However, average cost of (funds) can be between 18 per cent to 24 per cent per annum,” said Vikas Bhasin, MD, Saya Homes.


Currently, along with housing finance companies (HFC), NBFCs account for about 60 per cent of real estate developers’ loans. But, the liquidity crisis sparked off by the IL&FS defaults have made this segment more cautious in lending to realtors.


“Many NBFCs like Dewan Housing Finance have stopped loans to developers. Others are also very cautious while lending to developers. There is private equity (PE), but they are mainly interested in commercial real estate which makes it difficult for developers to raise fund, especially for residential projects,” a senior executive from National Housing Bank told this publication.


Developers have consequently been caught between servicing debt payments and completing their projects, for which there are few takers. A study from research firm Liases Foras suggests that developers have to repay about Rs 1.29 lakh crore a year on outstanding debt but generate less than half that amount in income.


“There are many developers who have been asking for more time for repayment. If the liquidity condition does not improve, which seems unlikely seeing as elections ahead, defaults from developers are going to be a matter of great concern in the next two quarters,” another executive from Kotak Realty Fund said.


Builders such as DLF Ltd. and Indiabulls Real Estate Ltd. have responded by selling rent-yielding office assets and land parcels as well by entering into development agreements with private equity players. But, small developers are struggling to complete projects and stay profitable.


High cost of input materials also an issue


According to Nipun Gabam senior vice president, Fairwealth Group, there has been an increase in the prices of raw materials like cement, steel and tiles, which has resulted in the cost of projects rising significantly over the past few quarters


A rock and a hard place


  • Earlier, a substantial portion of funds were raised from pre-launch sales and bank loans based on amount of units sold
  • Another significant portion of funds were raised from NBFCs, a source which has now dried up due to the liquidity crisis
  • Builders are trying to raise funds to complete projects even as they struggle to  service existing debt obligations