Bank Lending to Commercial Real Estate Continues to Grow
Recent data from the Reserve Bank of India (RBI) reveals that outstanding loans for commercial real estate reached Rs 1187.1 billion as of January 2012. This represents a 12.2% increase compared to the same period in the previous year. While this growth is lower than the 19.9% observed during the same period a year earlier, the sustained double-digit growth contradicts the claims of reduced bank lending made by publicly listed real estate companies.
Unlisted Developers Emerge as Key Borrowers
The continued lending to real estate development is largely attributed to the activity of unlisted property developers across the country. These realtors, who have historically operated outside the spotlight of major Indian real estate narratives, are progressively securing a greater portion of bank loans.
Research Supports Lending Growth Despite Regulatory Efforts
A research report released in December by IDFC’s Institutional Securities team corroborates this trend, indicating that bank and NBFC loans to developers have risen by 15% to Rs 1.8 trillion in the 12 months leading up to September 11. This growth occurred in spite of increased interest rates and the RBI’s attempts to restrict lending to the real estate sector. Notably, unlisted developers received over 72% of these loans.
Listed vs. Unlisted: Challenges and Pressures
Several factors may contribute to this shift in lending patterns. Listed real estate companies often face rigorous performance targets and the pressure of quarterly disclosures. The sheer magnitude of their projects and the companies themselves further amplifies these pressure points, particularly during market volatility. When market conditions become challenging, project execution can falter, leading to project backlogs and reduced access to credit.
Unlisted Developers Attract Private Equity
While the majority of unlisted developers are smaller entities, several substantial private groups operate across various regions of the country. The immense scale of the unlisted developer landscape has attracted the attention of private equity investors, who are increasingly backing projects spearheaded by these unlisted real estate firms. Even with the presence of smaller players, the sheer number of private developers has become a significant factor in attracting funding from private equity investors, who are actively seeking opportunities in this segment of the market.