after the Reserve Bank of India (RBI) increased the
provisioning for commercial real estate.
This, they said, would increase the cost of funds.
Developers expect up to 75 basis points rise in cost
of funds after the central bank increased banks’ provisioning
requirement for commercial real estate from 0.40 per cent to 1 per cent.
“I think affordable housing will become more expensive
as banks will raise rates and credit offtake will slow.
Availability of bank funds will become a big issue for
developers now. We will bank more on our sales and instead
of raising additional funds. We will focus more on internal accruals,”
said Sarang Wadhawan, managing director of HDIL, a Mumbai-based developer.
“Execution of projects will suffer due to lack of bank funds,” said Wadhawan.
A number of property developers such as
DLF, Unitech, HDIL and Lodha, among others,
have ventured into affordable housing since the
third quarter of the previous financial year to
beat the slowdown in property sales.
The projects are 25-40 per cent cheaper
than market prices and carry margins of 15-20 per cent
as against the luxury projects’ margins of over 50 per cent.
“It will certainly increase our cost of borrowing.
We will consider this increase like any other increase in input cost,”
said Bharat Mody, chief financial officer of Akruti City.
RBI increased provisioning as it felt that credit flow to
commercial real estate had risen sharply and there
had been large increases in restructuring of loans
by developers. Some top developers of the country
such as DLF, Unitech and HDIL have restructured
loans worth Rs 10,000 crore after RBI allowed banks to do so.
“The amount of non-food bank credit going to commercial
real estate is very small, I believe around 3.7 per cent.
However, our decision was prompted by two considerations.
First, the rate of growth of credit through CRE has been
accelerating at one of the fast rates. Second, we looked
at the restructuring done by banks.
While the restructured portion at the aggregate level
was 4 per cent, it was 14 per cent for the real estate sector.
This prompted us to raise the provision requirement for the real estate
sector,” RBI Governor D Subbarao said at a press conference in Mumbai today.
Loans to the real estate sector grew 41.5 per cent in the
12 months up to August 28, 2009, to Rs 96,701 crore
. On the other hand, total non-bank food credit grew
13.3 per cent in the 12 months up to August 28, 2009
to a total outstanding of Rs 26,23,551 crore.
In November last year, RBI had reduced the risk weight
on loans for the commercial real estate industry to 100 per
cent from 150 per cent and reduced standard asset
provisioning requirements to 0.40 per cent.
This was after the developers met the finance minister
to express concerns over liquidity. Apart from drastic fall
in property sales, developers were facing severe liquidity
crunch as bank debt and foreign borrowings dried up
and domestic stock markets fell sharply.
Analysts said developers would now find it difficult to raise funds.
“It will be challenge for developers to get bank debt.
Financial closure will become difficult for real estate projects,”
said Ambar Maheshwari, director of investments at DTZ,
an international property consultant.
However, developers say since many of them have
restructured debt or reduced their debt levels, the
RBI move will have less impact on their existing loan
portfolio. “If we go for additional funding, the cost will be higher.
It will not have much impact on our existing debt,” said Sunil Malhotra,
vice-president, finance, at Omaxe, a New Delhi-based developer.
Bankers also say the RBI move will not lead to any drastic rise in rates.
“This (increase in provisioning) may not translate into a sharp rise
in lending rates. The interest rates are already low and any
small increase can be absorbed,” said a head of treasury with a private
bank. A senior State Bank of India official said there could
up to 40 basis point rise in interest rate on loans disbursed to builders.
This would be done to offset the additional amount that
banks would have to set aside for standard real estate assets.
basis points rise in cost of funds after the central bank
increased banks’ provisioning requirement for commercial
real estate from 0.40 per cent to 1 per cent.
“I think affordable housing will become more
expensive as banks will raise rates and credit offtake
will slow. Availability of bank funds will become a big
issue for developers now. We will bank more on our
sales and instead of raising additional funds.
We will focus more on internal accruals,”
said Sarang Wadhawan, managing director of HDIL,
a Mumbai-based developer.
“Execution of projects will suffer due to lack of bank funds,”
said Wadhawan.
Posts
No comments:
Post a Comment