NBFC crisis may push up borrowing costs for real estate developers

The latest crisis of non-banking financial companies (NBFCs) could push up borrowing costs for property developers and pose challenges for big real estate developers.

The recent downgrade of Reliance Capital has revived liquidity problems for NBFCs, which were recovering from the crisis triggered by the IL&FS defaults last year.

Along with housing finance companies (HFCs), NBFCs account for about 60 per cent of property developers’ loans.

“Lending rates may go up 60-70 basis points now. So far, only small and mid-level developers were affected. I feel even bigger ones will face liquidity problems now,” said Amit Goenka, managing director and chief executive officer at Nisus Finance.

After the IL&FS issue, lending rates for developers went up 200-300 basis points as NBFCs faced a liquidity squeeze. While NBFCs increased rates to 18-19 per cent, private equity funds started charging up to 23 per cent.

Rajeev Talwar, chief executive of DLF, said: “There will be a crisis because NBFCs themselves are in trouble.”

However, Talwar said DLF did not face any issue, given its low debt after its promoters’ stake sale in its rental arm to GIC and the recent qualified institutional placement.

He said bigger developers might see problems if they had big debts.

Developers have been facing liquidity crunch because many NBFCs and HFCs have stopped lending to them and home buyers.

For instance, DHFL and Edelweiss have stopped lending to home buyers and property developers.

Piramal Enterprises has also become slow and selective in lending to developers.

Recently the Confederation of Real Estate Developers Association of India wrote to the finance minister, accusing NBFCs, mainly Indiabulls, of increasing lending rates and increasing escrow percentages from 30 per cent to 100 per cent, reports said.
Emails sent to DHFL and Edelweiss did not elicit any response.

An Indiabulls spokesperson recently told Business Standard credit to real estate firms had not stopped.

“We continue to disburse funds to our partially disbursed cases in accordance with their construction progress. All our real estate developers’ assets are of the highest quality … we fund only top 15 developers in major cities in the country. We mostly fund developer projects that are in an advanced stage of completion and where collections in escrow accounts fund construction and loan servicing,” he said.

Shobhit Agarwal, managing director, Anarock Capital, said: “There is no money in the tap. Whether there is fresh crisis in NBFCs or not, the situation will remain the same.”

Agarwal said resuming (of new loans) by NBFCs would be delayed by two to three quarters.

The current liquidity crisis has come as a “double whammy” for developers who are battling various regulatory challenges.

Niranjan Hiranandani, chairman at Hiranandani Cons­tructions, said real estate companies faced regulatory changes, which had created new challenges, including slowdown in sales and a credit squeeze.

“Given this ‘twin trouble’ scenario, liquidity is a challenge because banks are largely not sanctioning funds for real estate firms, and the disbursal of home loans to home buyers is slow,” Hiranandani said.

He said the Real Estate Regulatory Authority (RERA) had created the requirement of 70 per cent of project proceeds in escrow accounts, which blocked the little fund flow that was happening. This situation has created a fiscal challenge that is impacting financial viability in delayed and stalled projects, he said.

With sales almost down 50 per cent, the situation is the “new normal”, said a Mumbai-based developer, adding it would continue for the next two to three years.

“Already 25-30 per cent of developers have disappeared from the markets. I believe another 40 per cent will disappear soon,” he said.
With inputs from Karan Choudhury and Subrata Panda

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