industry

Debt refinancing deals slow down in real estate sector


MUMBAI: Lenders, particularly non-banking finance companies (NBFCs), are no longer keen to refinance debt of real estate developers, thanks to a liquidity pressure and increasing caution.

While established developers with a track record still have access to funding, mid-sized developers operating in not so lucrative markets are finding it difficult to get their loans refinanced, industry experts said.

Money entering the system through new funding transactions is also expected to come down here on, they said. Over the last few years, refinancing had become a preferred route for developers to lower their cost of borrowing.

Until now, NBFCs and other lenders were keen on refinancing deals for developers and real estate projects. Refinancing is considered safer because the earlier lenders had already done all the due diligence and checked various risks related to legal, valuation and credit worthiness before funding them. All these variables are usually known at the time of refinancing and the new entrant is expected to assume reduced risk on execution and sales alone, experts said.

However, the number of such deals has fallen significantly due to liquidity pressure and firming interest.

“In the quest for rapid growth in assets under management, several large NBFCs and HFC lenders earlier lent to builders in excess of the value of the underlying assets,” said Amar Merani, managing director at Xander Finance, an NBFC owned by Xander Group.

“With the new reality of higher interest rates and lower sales prices, the loan cover has dwindled down further, making the refinance an unviable option in most cases,” he said.

Given the sudden change is scenario, NBFCs are not interested to be the last entity holding these assets.

Industry experts are of the view that if this continues for some more time, most category B and C developers looking for debt refinancing may have to give up their projects in favour of existing lenders or offload them in the market.

Balance transfer, known as BT in finance industry, was quite prevalent two to three quarters ago and most lenders were interested in these deals given the fit being offered to grow their book aggressively. “There have been book building pressure on NBFCs for last 3-4 years and we have observed that average book maturity of real estate with NBFCs was around two years,” said Subhash Udhwani, founder of real estate-focused boutique investment bank Elysium Capital.

“As the rundown of book is very fast, NBFCs kept looking at opportunities of transactions wherein initial disbursement is 40-60% of transaction size and that is only possible if existing transactions are being taken over,” he said.

Falling interest rates over the last couple of years had provided developers and lenders a window of opportunity to refinance debt to lower cost of funding and get out from earlier investments.

Now, with the current credit squeeze in market, quantum of such transactions has been going down and existing lenders are under pressure as they will be the ones holding the transaction till maturity.

Though balance transfer was quite regular in about top 12 cities, experts believe that going forward it will get restricted to top five cities with a known set of developers. According to Udhwani, there will be concerns in taking over big-ticket transactions and one can expect stringent due diligence and increased turnaround time. Financial institutions are also likely to charge premium in terms of higher coupon and fee for providing these solutions.





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