With the property market getting consolidated in their favour, top real estate developers are now able to command a lower rate for construction finance at 8.75% to 9%, a good 1% to 2% less from they were getting one year ago, said property market experts.
In comparison, the medium and smaller developers are not even able to garner lease rent discounting (LRD), which are the cheapest form of loan for developers, at that rate, experts said.
Construction finance for residential property is usually for a 3-5 year tenure while it can be longer for commercial properties. The trend of top developers getting cheaper construction finance has become more evident mainly in the last one year as “flight to quality “caught up among discerning home buyers’, experts said.
“Top developers are getting CF at 8.75%. They are demanding and getting cheaper rates. Banks are okay with lower margins but prefer loans where safety of principal is guaranteed,” said Vishal Shrivastava executive director at Anarock Capital, a real estate focused investment banking firm.
Shrivastava said banks are increasingly moving towards giving larger sums of loans for top developers than giving smaller sums to Grade B and C developers.
“We are increasingly seeing this in last 12 months’” he said. The share of listed developers and top unlisted developers in total home sales have shot up from 17% in FY17 to 34% in H1 of FY24, according to Anarock Property Consultants.
“Banks are clearly differentiating corporate developers from the rest. They know the track record and credibility of these type of developers are better,” said Sanjay Dutt, managing director or Tata Realty & Infrastructure.
Since they have seen the up and down real estate cycles, banks are much better informed now, he said adding that ” lower the risk, lower the rate,” that top developers carry lower risk of defaults.
A senior executive at a large business group in Mumbai said that banks are treating AAA rated firms in real estate like REITs in the same lines like a AAA rated firm like, for instance, Hindalco.
“Earlier there was a difference between a AAA real estate firm and similar rated firm in other industry,” he said. Embassy Office Parks REIT, Mindspace Business Parks REIT and Brookfield India Real Estate Trust are AAA rated firms in real estate.
“The case of stronger, better capitalised and governed developers with demonstrable track records being courted by lenders is indeed playing out,” Chanakya Chakravarti, former head of indirect strategies, Asia Pacific at Ivanhoe Cambridge, the real estate arm of Canadian fund manager CDPQ and a veteran private equity investor in real estate .
This is directly co-related to the rapid consolidation in the sector over the last three years with poorly capitalised and governed operators being actively shunned by investors, lenders and customers alike, Chakravarti said .
He added that this is an encouraging trend as it rewards prudent balance sheet expansion, better governance, institutional processes and most importantly, adherence to customer commitments.