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An Understanding Of The Real Estate Sector And Bank Credits
06 Dec 5 min Read Read by 2371
All businesses require funds to implement and finish projects. The realty segment is no different. Real estate finance is at the core of any developer’s ability to start, complete and deliver a project, be it residential real estate or commercial real estate.
So how does the real estate sector acquire this funding? Banks play a vital role in lending funds for various projects. In some cases financial institutions, private investors also invest in real estate projects by providing financial support.
The recent banking sector problems (loan defaulters, frauds, embezzlement, etc.) have affected all major industries including real estate. The standard asset provisions for loans to commercial real estate is, therefore, more (0.75 to 1%) than the prevalent figure of 0.4%.
The real estate sector has been affected to an extent that the public sector as well as Non-Banking Financial Companies (NBFCs), have become extremely cautious in lending money. The resulting cash crunch has severely affected the property cycle for a lot of builders.
Projects halted due to cash crisis
In the backdrop of the recent banking sector troubles, the banks are being extra vigilant before approving any loans, especially to the builder and developers. The bigger construction houses might have escaped to a certain extent due to good credit records, but the mid to smaller players are struggling to stay afloat in the face of the non-availability of funds.
A lot of ongoing projects have been halted indefinitely and with RERA penalties looming for non-delivery of a project in the set upon time frame, the woes of these builders are getting worse.
Disruption of the property cycle
The severe cash crunch in the realty segment has left many builders/developers unable to complete ongoing construction, resulting in a disruption of the property cycle. The figures from Anarock are discouraging, stalled projects have affected a total of over 170,000 units in with over 100,000 units in the National Capital Region (NCR) and more than 38,060 units in the Mumbai Metropolitan Region left uncompleted. A quick resolution to this liquidity crisis needs to be found for the real estate sector to pick up again.
Setback for the affordable housing segment
Affordable housing has been a long-held dream of the government with ‘housing for all’ target set for 2022. But recent banking problems like bad loans and NPAs have caused distress. This basically means that the banks are reluctant to lend, even for affordable housing. As this scheme is aimed primarily at the economically weaker sections of society, delay in these projects will deny them quality housing.
Rise in property prices
If one channel of funds is almost closed, in this case, the banks, then the real estate industry has to look at alternative means of lenders. So when the banks can’t, or won’t, lend to construction projects, the builders have to borrow from private investors or NBFCs but at higher interest rates. Naturally, the extra cost will be finally borne by the home buyers resulting in rising property prices.
The government has realized the severity of the problem faced by the real estate sector and in an effort to revive delayed projects and provide relief to builders/developers and buyers has proposed to set up a corpus fund in excess of ₹25,000 crore to provide priority debt financing for the completion of stalled housing projects in the affordable and mid-income housing sector. With an initial contribution of ₹10,000 crores, the government will sponsor the fund with the SBI (State Bank of India) & LIC (Life Insurance Corp of India) contributing a further ₹15,000 crore. Financial institutions, sovereign wealth funds, public and private banks, domestic pension and provident funds will be co-investors.
Due to their commitment to the highest standards of business ethics and transparency in all its operations, Mahindra Lifespaces, a leading real estate developer in India has effectively managed to duck the troubles facing the real estate sector. Established in 1994, Mahindra Lifespaces has been delivering quality residential real estate projects, mainly in the mid-premium segments. Currently, they have multiple ongoing projects in Mumbai, Bangalore, Chennai, Nagpur, Pune, and Gurgaon. Mahindra Lifespaces is focused on providing affordable housing combined with integrated living through businesses, infrastructure, social and residential facilities. To find out all about their ongoing projects please visit the website Mahindra Lifespaces
References:
1. https://www.indiainfoline.com/article/general-blog/will-the-banking-mess-impact-the-real-estate-sector-118051400029_1.html
2. https://www.livemint.com/industry/banking/lenders-seek-priority-tag-for-loans-under-real-estate-fund-11574096637215.html
