Realty market faces fund crunch

Tinesh Bhasin / TNN / May 31, 2006, 00:24 IST

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With banks refusing to lend to developers, construction activity may slow down.

MUMBAI: On the face of it, real estate business seems in for some rough weather. With banks refusing to lend money to developers for buying land, experts believe there will be a slowdown in the pace of construction and expansion witnessed over the last two years.
For real estate business, land is raw material. And builders like to keep a ‘land bank' for future construction."With bank finance not available for land acquisition, our business is going to get affected," says Mukesh Patel, MD, Neelkanth group.
Patel's concerns aren't misplaced, and find an echo in the industry. In the past, banks were a cheap source to borrow funds for multiple land accruals. This is important because acquiring land is the easy part. It takes a developer anywhere between four and five years to get a project off the ground. Once development begins, internal accruals come in and take a project to completion.
"With banks cutting off funds to developers and higher interest rates on home loans, property prices will go further north," says Ramesh Jogani, CEO, IndiaReit, a real estate venture fund.

There are others who agree with Jogani. "The demand for property far exceeds supply. Even if we go elsewhere for financing, land cost will escalate as our borrowing will be expensive," said a leading developer. "In any case, developers hold on to property to get better rates and sell it slowly. As projects become fewer, the market is going to hit the threshold faster."
So, why did banks stop the funding? "This is in tandem with RBI norms. Hence, we have stopped financing projects without approvals from regulatory authorities, as per the circular," said Rajiv Sabharwal of ICICI Bank.

Last month, RBI had called for a slowdown in lending to sensitive sectors like real estate, and raised the risk weight on bank exposure from 125% to 150%.
The impact of the circular has started becoming visible. "The number of developers participating in land auctions has gone down significantly. Those interested come in JVs, either with another developer or with a real estate venture fund. Most participants in land auctions are corporate developers the ones listed or are real estate divisions of large corporates," Jogani said.
"But the real impact on businesses will be obvious only over the next six months as land banks start to deplete," points out Patel.
The flip side to this is unconcealed glee on the faces of established developers who are sitting on huge reserves of land. "We see it as a boon. Easy financing options gave rise to many unscrupulous developers. This move will curb them and bring stability into the real estate market," says Nainesh Shah, executive director, Everest group.

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