As NBFCs face credit crunch, real estate sector pushed to the brink

As NBFCs face credit crunch, real estate sector pushed to the brink
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New Delhi, Dec 6: Property developers could default on their repayments following the liuidity squeeze faced by non banking finance companies (NBFC), who have been major lenders of real estate in the absence of bank lending.
Alongwith housing finance companies, NBFCs accounted for 61 per cent of overall commercial real estate borrowings as of March 2018, said a recent report by CLSA. The real estate loans given by top NBFCs have grown between 24-70 per cent between FY16-FY18, it said.
Many developers were borrowing from one NBFC to repay another one. The NBFC liquidity issue has put a break to this, experts said.
“With limited incremental funding to the sector from banks, which grew at just two per cent in fiscal 2018, NBFCs and HFCs came to the developers’ rescue. However, given the current pressure on liquidity for NBFCs, a potential cascading effect on select projects and developers, could make access to funding more difficult for them,” said a report released by rating firm Criisl.
Developers with a portfolio of commercial assets have been able to manage their liquidity better and are expected to continue to do so, it said.
“Refinancing of loans has stopped due to NBFC crisis. It will push developers to default mode,” said Sandeep Runwal, director at Mumbai based Runwal group.
When asked about the impact on his group, he said when there is distress in the market, it will hit all developers with a “varying degree.”
Chairman of a Mumbai based real estate company said that NBFCs were scratching each other’s back. “Whenever a loan was getting defaulted, it used be swapped by another NBFC. Now it will stop,” he said RBI should do audit of the NBFCs who have lent to real estate developers recklessly.
Lower home sales, accruals:
Home sales were low for the last couple of years due to issues such as demonetisation, GST, and so on which has made home buyers delay their purchasing decisions. Home sales dipped seven per cent in 2017 on a yearly basis, Knight Frank said. They rose just eight per cent in the first nine months of this year in top seven cities, Anarock Property Consultants said.
“Festive season was quite bad. Sales happened only in a few categories such as completed properties,” said Rajeev Bairathi, executive director and head of capital markets, at property advisory Knight Frank India. According to Crisil, demand for homes dipped four to five per cent between FY2016-Fy2018 and it is expected to go up four per cent between FY19 to Fy2021.
Developers are also facing weak internal accruals due to lower loan disbursals, fund managers said.
Amit Goenka, managing director of Mumbai based real estate investment firm Nisus Finance said growth in home loans is expected to slow down to 20 per cent from 35 per cent earlier. Since the home loan market is worth Rs 7 trillion, the decline in growth is expected to be around Rs 1.25 trillion which is a major issue for developers. “They (developers) not getting lenders to lend to borrowers. Sales are of no value if they do not create liquidity for their projects through loans. They were using these funds to manage construction, pay interest and so on, “ Goenka said.
Shobhit Agarwal, managing director of Anarock Capital said the current crisis in real estate was triggered by IL&FS issue not because of developer’s’ default. “NBFCs have exposure to IL&FS which is supposed to be good company. There was a perception that if a AAA company has this situation, what is the condition of developers. Then investors stopped lending to NBFCs which in turn stopped lending to developers. It is a chain.” he said..