Builders at private lenders’ mercy as demand falls, forced to pay interest rates as high as 42% - The Economic Times
NEW DELHI | BANGALORE: The stress among real estate developers is now showing clearly. Private money lenders are back in demand with small and mid-sized real estate developers picking up short-term money at interest rates as high as 42% a year to avoid the prospect of reducing property prices.
With home sales dropping and banks being picky about lending to the sector, many real estate developers are facing a liquidity crunch, which would eventually force them to reduce prices to book sales. This, they fear, could induce a downward spiral in property prices.
According to the National Housing Bank's residential housing index, Residex, 22 of the 26 cities it tracks have already seen a marginal decline in home prices in the April to June quarter. A recent report by property research firm Liases Foras puts the cumulative nationwide unsold inventory at 670 million sq ft, or around 6 lakh apartments, putting further pressure on real estate developers.
"Raising money even at exorbitant rates, developers hope, will help them fend off this crisis situation and keep prices steady till the economy picks up," says Ambar Maheshwari, managing director of corporate finance at property consultancy Jones Lang LaSalle.
Recently a Noida-based developer who had managed to sell only 30% in his housing project and needed money to pay some government charges and continue construction, borrowed Rs 20 crore from a local money lender at 4% a month for a few months and a collateral that was at least twice the value of the loan.
If he hadn't, the only option for him would have been to covertly sell some apartments at a discount and continue construction. Since he borrowed, he was able to reach a certain construction milestone after which construction-linked payments of his existing customers came in. A small Chennai-based builder, who did not wish to be named, says the market is very tight and even raising Rs 30 crore from banks and PE funds is difficult today for a small developer. "This is where money lenders come in, even though they charge us steeply."
When a developer does not have enough money to continue construction, the first impact is that existing buyers stop paying installments, explains Anckur Srivasttava, chairman of GenReal Property Advisers. "He then has no option but to cut prices or go for such expensive money," he adds.
While developers of some repute are able to raise money at 2-3% a month, the smaller ones are even paying close to 4% a month with greater collateral.
The desperation level, of course, varies from developer to developer which is being seen as an opportunity by several HNIs, exporters and diamond merchants, entrepreneurs and family offices.
Take the case of Rajesh Mehta, chairman of Bangalore-based Rajesh Exports, one of India's biggest gems and jewellery exporter — he has invested close to Rs 700 crore in such transactions.
"We are seeing huge pain in the market but are very selective in who we work with. There's demand for such money even from the best of developers," says Mehta, who has lent to mostly Bangalore-based developers at interest rates in the 2.5% to 3.5% a month range.
The former owners of Patni Computers that was sold to Nasdaq-listed IT services company iGate for $1.2-billion (Rs 5,450 crore) at that time have been investing their money in different spheres that includes buying completed real estate assets and also lending to real estate companies.
They recently lent to a Bangalore-based developer at an interest rate in the 20-25% a year range. "There are very few cashrich developers today. All others are looking for money. When we lend, we look at the builders' reputation, his ability to actually complete the project and the quality of the security he is offering," says Dinesh Maheshwari, who heads such investments for some of the former owners of Patni.
A Delhi-based exporter, who did not wish to be named, says he and his other HNI friends have set up a consortium of sorts that has been lending to several real estate developers in the region. "Interest rates might be steep, but today they are willing to pay," he says. And this demand for short-term money is only set to grow louder.
As elections draw closer, a lot of the money that has been put in by politicians and people around them is being pulled out of real estate companies, says Srivasttava, who is currently helping five developers across the country raise money from non-banking finance companies and some money lenders as well.
"Developers will get more desperate for money going forward as the situation is not likely to improve till after the elections," he says.
Amar Merani, chief executive officer of NBFC Xander Finance, says his company receives 10-12 requests from developers who are looking for money every month. "They are looking at raising anywhere between Rs 40 crore and Rs 250 crore to tide over temporary cash flow issues and refinancing," he says.
NEW DELHI | BANGALORE: The stress among real estate developers is now showing clearly. Private money lenders are back in demand with small and mid-sized real estate developers picking up short-term money at interest rates as high as 42% a year to avoid the prospect of reducing property prices.
With home sales dropping and banks being picky about lending to the sector, many real estate developers are facing a liquidity crunch, which would eventually force them to reduce prices to book sales. This, they fear, could induce a downward spiral in property prices.
According to the National Housing Bank's residential housing index, Residex, 22 of the 26 cities it tracks have already seen a marginal decline in home prices in the April to June quarter. A recent report by property research firm Liases Foras puts the cumulative nationwide unsold inventory at 670 million sq ft, or around 6 lakh apartments, putting further pressure on real estate developers.
"Raising money even at exorbitant rates, developers hope, will help them fend off this crisis situation and keep prices steady till the economy picks up," says Ambar Maheshwari, managing director of corporate finance at property consultancy Jones Lang LaSalle.
Recently a Noida-based developer who had managed to sell only 30% in his housing project and needed money to pay some government charges and continue construction, borrowed Rs 20 crore from a local money lender at 4% a month for a few months and a collateral that was at least twice the value of the loan.
If he hadn't, the only option for him would have been to covertly sell some apartments at a discount and continue construction. Since he borrowed, he was able to reach a certain construction milestone after which construction-linked payments of his existing customers came in. A small Chennai-based builder, who did not wish to be named, says the market is very tight and even raising Rs 30 crore from banks and PE funds is difficult today for a small developer. "This is where money lenders come in, even though they charge us steeply."
When a developer does not have enough money to continue construction, the first impact is that existing buyers stop paying installments, explains Anckur Srivasttava, chairman of GenReal Property Advisers. "He then has no option but to cut prices or go for such expensive money," he adds.
While developers of some repute are able to raise money at 2-3% a month, the smaller ones are even paying close to 4% a month with greater collateral.
The desperation level, of course, varies from developer to developer which is being seen as an opportunity by several HNIs, exporters and diamond merchants, entrepreneurs and family offices.
Take the case of Rajesh Mehta, chairman of Bangalore-based Rajesh Exports, one of India's biggest gems and jewellery exporter — he has invested close to Rs 700 crore in such transactions.
"We are seeing huge pain in the market but are very selective in who we work with. There's demand for such money even from the best of developers," says Mehta, who has lent to mostly Bangalore-based developers at interest rates in the 2.5% to 3.5% a month range.
The former owners of Patni Computers that was sold to Nasdaq-listed IT services company iGate for $1.2-billion (Rs 5,450 crore) at that time have been investing their money in different spheres that includes buying completed real estate assets and also lending to real estate companies.
They recently lent to a Bangalore-based developer at an interest rate in the 20-25% a year range. "There are very few cashrich developers today. All others are looking for money. When we lend, we look at the builders' reputation, his ability to actually complete the project and the quality of the security he is offering," says Dinesh Maheshwari, who heads such investments for some of the former owners of Patni.
A Delhi-based exporter, who did not wish to be named, says he and his other HNI friends have set up a consortium of sorts that has been lending to several real estate developers in the region. "Interest rates might be steep, but today they are willing to pay," he says. And this demand for short-term money is only set to grow louder.
As elections draw closer, a lot of the money that has been put in by politicians and people around them is being pulled out of real estate companies, says Srivasttava, who is currently helping five developers across the country raise money from non-banking finance companies and some money lenders as well.
"Developers will get more desperate for money going forward as the situation is not likely to improve till after the elections," he says.
Amar Merani, chief executive officer of NBFC Xander Finance, says his company receives 10-12 requests from developers who are looking for money every month. "They are looking at raising anywhere between Rs 40 crore and Rs 250 crore to tide over temporary cash flow issues and refinancing," he says.
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