How Large Developers Bucked The NBFC Crisis
Most big developers continue to have access to debt instruments, says Macquaire.
Large property developers averted the liquidity crisis due to minimal reliance on non-banking financial companies, according to a Macquarie report.
Most big developers and the ones with rental income still have access to debt instruments and bank loans, and their reliance on expensive debt from non-bank lenders remains low, according to the brokerage’s latest report on India’s real estate sector.
A gradual reduction in the inventory of larger developers indicates that sales continue, the report said, adding that borrowing costs for select developers have fallen over a four-year period. The brokerage expects large builders’ access credit at a reasonable cost accelerating the ongoing consolidation in the sector.
Real estate companies rated AA by ICRA—high degree of safety regarding timely servicing of debt—borrow a meagre 3 percent of their total credit demand from non-bank lenders, the report said. Nearly a fourth of total borrowing in the case of A-rated developers is satisfied by NBFCs, it said, adding that around 60 percent of the borrowings of the BBB-rated companies is sourced from such lenders.
Borrowing Costs
The report said interest costs of four listed developers—Sobha Ltd., Phoenix Mills Ltd., Godrej Properties Ltd. and Prestige Estate Projects Ltd.— fell at least 170 basis points over the last four financial years. The biggest beneficiary is Godrej Properties whose interest rate has fallen 310 basis points to under 8 percent as of March 2019.
NBFCs Aided Real Estate Growth
Non-bank lenders have “very aggressively” funded around 85 percent of the incremental real-estate credit over the past four to five years, according to another Macquarie report on Indian banks and non-bank lenders. “A majority of this incremental lending has been to low-rated developers,” Suresh Ganapathy, head of financial services research at Macquarie, told BloombergQuint.
These, according to the brokerage’s latest report, are worrying statistics and history has shown that any rapid growth in one segment for financials has eventually resulted in bad loans following with a lag as the loan book seasons.
A closer look at the non-banking lenders’ developer book versus banks’ developer book reveals that NBFCs have grown their developer book at 35-40 percent compounded annual growth rate over the past four to five years. However, banks have grown their book at 5 percent.Macquire report on Indian banks and NBFCs.
Inventory Falling
The report, based on the data compiled by Anarock, suggested that residential inventory levels have been coming down across seven key markets, mainly led by fewer launches and some increase in demand. Developers also remain focused on launching projects in the mid-income range which have better traction, it said.
The bucket consisting of properties costing less than Rs 40 lakh occupied over 40 percent of the new projects launched in 2018-19, the data showed.
