Commercial real estate loans to get costlier

RBI has tightened the screws on bank lending to the real estate sector - a move that did not go down favourably with the stocks of real estate companies. The BSE realty index fell by over six per cent.

All the realty stocks ended in the red. Sensex stock, Unitech plunged 7.5 per cent to Rs 86 after toucing a low of Rs 84. DLF tumbled 6.5 per cent to Rs 402. Omaxe crashed 10 per cent to Rs 107. HDIL tanked 8.6 per cent to Rs 341. Ansal Infrastructure shed 8.5% to Rs 69. Parsvnath, Phoenix Mills, Peninsular Land, Ackruti City and Orbitco slumped 5-7 per cent each.

Last December, real estate developers heaved a sigh of relief when the RBI allowed restructuring of loans up to June 30, 2009 as a part of its stimulus package. Since then, all major companies rescheduled loans worth crores to avoid default. but now, the RBI has had a change of heart.

Today the RBI says, “In view of large increase in credit to the commercial real estate sector over the last one year and the extent of restructured advances, it would be prudent to build cushion against likely NPAs.”

The central bank has concerns on the ability of developers to repay loans even at a later date. So, the provisioning requirement for advances to the sector has been increased from its present 0.4 to 1 per cent. This means the interest cost for developers is set to increase. DLF and Unitech have an average interest cost of about 12 per cent which is set to rise to about 12.75 or 13 per cent.

Developers are yet to get clarity on whether this provisioning will increase on existing bank loans. In fact, in the past six months, very few fresh loans have been sanctioned to real estate companies. So the RBI is sending out a clear signal for banks to be cautious even before the cycle of fresh lending begins

Brokerages point out that RBI's move may trigger a second round of equity funding for listed players. Listed companies have lapped up more than Rs 13000 crore rupees via qualified institutional placements in the past seven months. Some of these funds have been directed towards working capital needs. What’s more, about $ 3 billion is waiting in the wings to be raised via the IPO route by six companies. But for unlisted companies, funding options may be far lesser. for consumers, this move seals all possibilities for a further dip in prices. In fact, it is all set to increase

Sarang Wadhawan, Managing Director, HDIL, said, “You have to understand that the sector was just recovering, this will definitely affect developers in a way that projects which were under execution. Now we will have to increase prices to compensate for this cost that will be incurred, at the same time, affordable housing segment will be hit because of this.”

Even as companies have clocked in good volume in sales over the past two quarters, it remains to be seen whether an imminent price increase will sustain the recent uptick in demand.