Developers Explore Lease Discounting Amidst Lending Crunch
With traditional bank loans becoming increasingly scarce, real estate developers are seeking refuge in alternative financing methods like lease discounting to finalize current projects, particularly in the commercial sector. This strategic shift comes as the industry grapples with a significant downturn, experiencing over a 60% decline in demand over the past six months, according to industry analysts.
Lease discounting offers developers a crucial lifeline by enabling them to secure bank loans for new ventures by leveraging the rental income generated from completed projects. These completed projects often serve as collateral, providing banks with a tangible asset and a predictable revenue stream, thereby mitigating the risk of default.
Advantages of Lease Discounting
This financing mechanism offers attractive terms for both borrowers and lenders. Banks typically charge interest rates 1-2% lower than the standard lending rate for these loans, which are generally structured over a five to six year term. A senior official from SBI Capital Markets emphasized this point stating, "Lease discounting is a much safer mode of lending, as the entire loan amount is covered through the rent agreement, and the banks are cushioned against defaults.”
For commercial real estate projects, lease discounting stands out as a favored funding choice, unlike residential projects where funding predominantly originates from buyer advances. “Unlike other sources, bank loans against lease agreements have haven’t dried up in the recent months. Also the bankers are more interested in such safer modes of funding,” commented Pradeep Sureka, president of CREDAI Bengal.
Ravindra Chamaria, chairman and managing director of Infinity Infotech Parks, further elaborated on this trend: “For commercial project, internal accruals and banks have been a major source of funding. However, the banks are now selective in lending, and rent discounting is an option for developers who already have one commercial project on lease.”
Banks' Perspective on Lending
Major public sector banks, including Allahabad Bank and Uco Bank, confirm having limited exposure to the real estate sector and minimal scope for additional lending at present. These institutions prioritize alternate instruments like lease discounting after a thorough evaluation of the potential risks involved. A representative from Allahabad Bank explained their cautious approach, stating, “We have entered into lease discounting arrangements with developers. However, one has to take into account several factors like proper lease agreement, credit rating and market conditions before entering into such agreements.”
Echoing this sentiment, a source at another public sector bank revealed the constraints faced by many institutions: “We have limited headroom for real estate sector, and we have already exhausted the stipulated limit for real estate lending. If we had the limit, we would have considered, alternative and safer lending options to the sector.”
Market Dynamics and Developer Strategies
Amidst these financial challenges, the declining viability of commercial projects has led numerous developers to repurpose them as residential properties, as observed by Pradip Chopra, chairman and managing director of P S Group, a company also involved in an IT project in Sri Lanka. Chopra further remarked, “Recently, many banks have extended substantial credit to real estate developers. For example, one of the public sector banks recently funded as many as ten real estate projects in Kolkata.”
The withdrawal of funds by foreign institutional investors has further compounded the situation for nationally operating real estate developers. They are now impelled to seek new financial tools to complete ongoing projects, as the FIIs’ exit markedly decelerates the pace of construction in commercial endeavors, confirmed a source at Unitech. This predicament has further underscored the allure of lease discounting as a viable financing option in the present market. "The FIIs withdrawal had a major impact on real estate projects. Evidently there is a slowdown in the pace of construction in commercial projects,” a source in Unitech reported.