New Delhi

Banks are wary of lending to real estate firms despite early signs of pick up in demand in the sector as one of the big segments of the industry, commercial projects, continue to face oversupply. Demand in commercial real estate has not picked up compared to the sharp uptick in residential units over the last few months. Many office spaces are still unoccupied, while ready projects have no takers.

The lack of cash flow in multiplexes, retail and office spaces has kept bankers averse to fresh lending. “We are enthusiastic about individual housing mortgage but are going slow as far as commercial real estate is concerned,” said Allen Pereira, CMD at the state-owned Bank of Maharashtra. Anurag Mathur, MD at real estate consultancy firm Cushman & Wakefield added, “Banks are preferring to fund residential projects over commercial ones as demand in the former has picked up much more.”

Most of the residential projects are on self-financing mode for which builders buy the piece of land and then sell residential units to end users. But builders depend on borrowings to finance commercial projects. Lack of lenders to this segment means many realty firms who wish to complete their pending projects are unable to do so.

Besides uncertain demand scenario for commercial space, banks are also concerned about the pile of debt related to realty sector accumulated on their books. Some banks have reached their internal sectoral exposure limits and may not be lending afresh due to this reason. “We are well within the limit but will take exposure only after thorough due-diligence,” said Ranjan Dhawan, chief general manager Punjab National Bank.

The real estate sector, especially the commercial segment, was one of the biggest casualties of the global economic downturn as companies restricted expansion plans. As per the Cushman & Wakefield report, 26.3 million sq. ft. of commercial space was absorbed in 2009, compared to 37 million sq. ft. in 2008.

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