Mumbai: Housing finance companies (HFCs) and non-bank finance companies (NBFCs) are increasingly becoming the major funding sources to real estate as banks have moderated their lending to the sector. While the overall real estate loan book expanded at a CAGR of about 15 per cent between FY14 and December FY18, India Ratings and Research (Ind-Ra) said the NBFC real estate book expanded at a CAGR of 60.9 per cent albeit on a smaller base.
During the period, the banks’ share in real estate funding has declined to 63.4 per cent from 77.1 per cent as the risk perception increased at a time when banks were struggling with asset quality and capitalisation issues.
NBFCs’ market share in real estate funding is expected to reach 17.8 per cent by FY20 from 13.7 per cent currently.
The rating agency noted that NBFCs’ loan growth has been underpinned by regulatory arbitrage advantage as banks and HFCs cannot finance land acquisition. This was further supported by large capitalisation base of some of the players that allowed them to take large single party exposures.
However, intensified competition among lenders amid slacking demand from greenfield projects has resulted in a sharp compression in yields in the last eight quarters raising concerns whether the risk is adequately priced in.
“The sharp slowdown in sales of under-construction properties both on account of limited expectation of price appreciation and adverse tax rules could necessitate revisiting the loan contracts by lenders. This is because lending agreements generally factor in sales velocity along with principal payments during the construction phase. However, as the sales velocity has reduced considerably, cash flow could be stretched more than expected,” said Ind-Ra.
Lending to the real estate sector according to the agency is typically backed by a cash flow cover, based on the certain assumption of sales velocity, price appreciation, timeliness of various approvals and completion schedule. However, Ind-Ra’s analysis shows that the cash flow cover falls significantly with adverse movements in these assumptions.
