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Funding to real estate sector from non-banking finance companies (NBFCs) and housing finance companies (HFCs) has almost come to a trickle. “With this, lending to the real estate market has now entered a difficult phase,” said Ramesh Nair, CEO and Country Head, JLL India. “Also these developments are likely to have an impact in the near and long-term. As a result of these events, the number of deals has reduced significantly,” he added.
Meanwhile, interest rates have increased by 150 basis points for those in need of funds. Lending at a higher rate of interest may appear favourable for lenders in short-term. However, this might eventually result in higher non-performing assets in the long term.
According to Nair, amidst all these, consumers continue to suffer for whom NBFCs were another source of credit for buying properties. Some NBFCs have even deferred home loans to buyers as they try to factor in the impact of the crisis on their business. As a result, the relaxation in loan-to-value norms is expected to discontinue as lenders have become more cautious in sanctioning home loans.
Moreover, any subvention schemes by developers to attract buyers have also been put on hold by banks as well as NBFCs. Sales in residential segment have been driven by buyers’ preference for projects with occupancy certificate to avoid paying GST. This has led to developers depending on NBFCs for funding during the construction phase.
This, Nair said, “is likely to affect the revival of the residential segment, which has witnessed signs of recovery in 2018. The NBFC liquidity crisis is expected to drive consolidation in the real estate industry. And developers with high leverage would be left with no other option but to hand over projects to lenders.”
He further added, the current crisis is also likely to result in the emergence of NBFCs/HFCs taking on the role of developers by taking over projects. NBFCs floated by large corporates and with presence across real estate value chain could vertically integrate to form large real estate entities with construction, finance and marketing expertise.
NBFCs/HFCs have supported the real estate sector when bank funding was depleting. However, the current liquidity crisis is expected to lead to short-term pain for the real estate sector. The sector is expected to see normalcy returning in the next two to three quarters.
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