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Challenges faced in Real Estate Finance

Real Estate in India accounts for nearly half of India’s capital formation and

generates approximately 30% jobs. India has emerged as one of the fewworld economies with a healthy economic outloo! amidst the mood ofcynicism and uncertainties supported by impro"ing macroeconomicfundamentals lie declining #scal de#cit! reducing in$ation and narrowing ofcurrent account de#cit.

e"ertheless! the real estate sector is gripping on downturn owing to slowpurchases from homebuyers! low absorption across all asset classes andincreasing in"entory.

 &raditionally! the real estate sector was #nanced primarily through pri"atelending by 'Is! ban #nancing and cash($ows through project sales.)ost*00+! di"erse channels of real estate #nancing emerged with the opening offoreign direct in"estments in the real estate sector. ,ri"en by high returns onin"estments! the sector witnessed capital deployment from pri"ate e-uityfunds as well as strategic in"estors and foreign de"elopers. arge capital$ows in the form of e-uity was made a"ailable within the maret at bothentity and project le"els. In addition! ey corporate de"elopers accessedcapital marets for funds through stoc maret listings! in both Indian ando"erseas stoc exchanges. &his led to reduced o"er(dependence on bandebt as a means of #nancing real estate projects in fa"or of e-uity andme//anine capital structures.

'owe"er! by mid *00! the global economic slowdown had its ripple e1ect on#nancing within the real estate sector as well. 2lowdown in sales on accountof muted demand diminished #nancing from internal accruals andsubstantially increased the dependence of de"elopers on external capital forfunding new projects and repaying existing liabilities. 2e"eral bans grew"igilant with respect to extending loans for early stage real estate projectswhich led de"elopers to resort to high cost me//anine debt and e-uity from45s and pri"ate e-uity funds for funding project ac-uisitions. &he 45and pri"ate e-uity funding channels ha"e continued to gain importance e"ersince with ban credit to commercial real estate and housing sectorsdeclining from 60 per cent in 47 *060 to .6 per cent in 47 *06+.

8e are seeing a real estate pullbac! with prices correcting in most tier(6 andtier(* cities alongside sharp drops in transaction and new launch "olumes. &he dri"ers of this slowdown is a mix of supply(side and demand(side factors.9t the supply(side! there has been a lending squeeze by the centralbank . &he Reser"e an of India :RI; has set threshold for maximumexposure to real estate! including indi"idual housing loans and lending to

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de"elopers for construction #nance! for bans at 6+ percent! which is -uitelow and is curtailing the growth of this sector. 9bsence of long term fundingfrom bans is forcing the de"elopers to fund their de"elopment projects athigher interest rates from other sources. &his has led to inade-uacy in8oring 5apital for their ongoing projects. o"ernment already on wheels! reducingregulatory hurdles and relaxed policy norms will impro"e in"estorssentiments maing housing a1ordable. Easy funding options and low lendingrate will boost the Real Estate once again.