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Developers take to new routes as loans get costlier

Submitted by on Thursday, 25 September 2008No Comment

Real estate developers, who are already straddled with stagnant demand for housing and high costs of construction, have now to reckon with a major liquidity crunch in the banking system and high interest rates on loans. While developers are optimistic that the current phase is temporary and the market is likely to rebound after the general elections, they are also seeking alternative funding methods including private equity players to fund their projects.

Currently, real estate developers pay interest rates as high as 18% on funds, due to their shortage. Niranjan Hiranandani, managing director, Hiranandani Constructions told FE, “I feel this is a temporary phenomenon and the liquidity crunch in the banking system will not have a major impact in the long term on the real estate market. Such ups and downs have happened earlier, too. There are many people who are still willing to invest and the years 2008 and 2009 will see more investors investing in the real estate market. Hence, we now need more construction. This is despite the fact that the cost of construction is going up due to rising inflation and limited supply.”

Earlier, Hiranandani had raised funds to the tune of $500 million internationally through UK’s Alternative Exchange. This means that the company is sitting on good cash reserves. Hiranandani said, “This is the right time for us to enter into new land deals as there is an expected correction in the Economy.” Similarly, many other builders who have sourced money from private equity players will now start buying land.

Says Rana Kapoor, managing director and CEO at YES Bank, “These days, most real estate developers are opting to get funded from private equity players for specific projects, as banks are charging high rates. Also, the traditional method of getting funded through banks are getting constrained, as the capital adequacy ratio and provisioning requirements is high on real estate exposure. This is one sector where banks have to exercise caution. In the long run, we believe, demand will soften and there will be a serious price correction in real estate properties.”

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