Home sales in India's top property markets fell 8 percent last quarter from year earlier

Indian builders struggling to sell homes amid mounting debt face a new hurdle: reluctant bankers.

"There's a lot of demand from builders and commercial real estate developers for loans," Ranjan Dhawan, Bank of Baroda's Mumbai-based chief executive officer, said. "There's a limit to how many builders we can finance. The current economic scenario has made us very cautious."

Expansion in lending for commercial real estate slowed to 8.9 percent in the 12 months through March 20, from 22.4 percent a year earlier, central bank data show. Home sales in India's top six property markets fell 8 percent last quarter from a year earlier, according to research firm Liases Foras, which estimates it will take 46 months to find buyers for unsold homes in Mumbai alone.

Some of India's largest developers have seen debt surge more than 60 percent as mortgage rates of around 10 percent deter buyers of their new apartment projects. Three out of India's five-biggest banks reported an increase in bad loans for the year ended March 31 as policymakers' efforts to boost investment and economic growth have yet to bear fruit.

Slowing inflation

Banks are also becoming more cautious about financing apartment purchases amid a slowdown in house-price inflation, the central bank said in a report on May 7, noting that lenders are bringing down the loan-to-value ratio for mortgages. The ratio represents the percentage value of an apartment that the bank may lend to customers.

Loans outstanding at Indian banks to developers stood at 1.7 trillion rupees ($27 billion), Reserve Bank of India data show.

The All-India Residential Property Price Index, which tracks real estate prices in 13 cities, increased less than 4 percent in the December quarter from the previous year, the lowest since the June quarter of 2011, according to the RBI. The pace of annual gains peaked at 28 percent in the three months to Dec 31, 2012. House prices in Mumbai fell by more than 3 percent in the December quarter from the year before.

Rising debt

Debt at Godrej Properties Ltd climbed 63 percent to 27.64 billion rupees in the quarter ended March 31 from a year earlier, while DLF Ltd, India's largest developer, had a 7.7 percent increase in its net debt to 209.7 billion rupees.

Sales will take at least 12 months to begin improving with the turnaround expected when interest rates move lower and the economy picks up, DLF said in a statement last Wednesday. DLF said it was in talks with a few private-equity firms to sell some projects.

The one-year government bond yield reached the lowest in almost two years last week, at 7.80 percent, as pressure mounted on the RBI to cut rates. It may be reluctant to ease as the rupee dropped 1.8 percent this quarter and traded at 63.6350 per dollar at 11:29 am in Mumbai.

More developers are opting for funds from private-equity firms and finance companies as banks pull back.

Piramal Fund Management invested 12 billion rupees in an Omkar Realtors & Developers Pvt project in Mumbai while Bangalore-based Ozone Group received 5.75 billion rupees from Piramal for a township project.

'Tough time'

Private-equity property funds disclosed 64 investments last year in India, of which 54 had a value of $2 billion, according to data from Venture Intelligence. The number of transactions was 14 percent higher than the 56 investments with 52 disclosed deals valued at $1.86 billion in 2013.

"The banking sector is going through a tough time with rising non-performing assets," said Mumbai-based Gaurav Gupta, director at Omkar. "Construction finance is available for quality developers, but it's scarce."

Stressed assets in the banking system will rise to 13 percent of total advances by March, according to India Ratings & Research Pvt. The ratio was 10.73 percent as of December, central bank data show.

The cost of capital at non-bank finance companies can be as high as 24 percent for some developers, N.M. Gattu, chief financial officer at DB Realty Ltd, said.

(China Daily USA 05/26/2015 page16)