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Banks Reluctant to fund Real Estate Companies

Comments Off on Banks Reluctant to fund Real Estate Companies   |   March 23, 2009    04:05pm   |Contributed by Indian Realty News

The crash strapped real estate companies are finding it tough to get funds from banks. All real estate developers are running from pillar to post in need of funds. Even as the government is pushing for additional measures to encourage housing activity, risk-averse banks are not coming forward to lend real estate developers, who now look panic-stricken with each passing day. Banks have asked developers to pledge more collateral, if they want funds from them. They are seeking as high as 150-200% collateral value against loans. In fact many developers are negotiating with five to seven banks for funding their projects, but success is hard to come if they are to be believed. A senior industry consultant, who didn’t wish to be identified, said that the day is not far when a big real estate player will go bust, with situation not improving. “May be that we will be the trigger for the housing sector. Developers, who till now have been showing discounts on paper, may then actually cut prices for their survival. The next two quarters are crucial not only for the realty sector but also for the Indian economy,” he asserted.

In fact, another reason why the banks are not funding the real estate companies is their market valuation has come down drastically in the last one year. Stock prices of major realty players, including DLF, Unitech, Housing Development & Infrastructure Ltd (HDIL), Indiabulls Real Estate, Puravankara Projects, Parsvnath Developers, Sobha Developers, Omaxe, Mahindra Lifespace Developers and Ansal Properties & Infrastructure have all tumbled more than 60% in the last nine months on Dalal Street. Says S C Sinha, executive director, Oriental Bank of Commerce: “It’s not that we have stopped lending to real estate companies but we are over-cautious. We are not lending to any new players but funding to our existing clients only. We are selective in our approach, as lending to this sector is a risky proposition in the current scenario.”

S K Goyal, CMD of Kolkata-based Uco Bank too gives the same logic. “We are funding very selectively,” he said when we approached him. None of the private or public sector banks we spoke to was willing to give names of the developers they have done funding to. Says S K Sayal CEO,Alpha G Corp: “With significant pressure on realty companies, they are likely to go for restructuring and focus on selective projects in the short to medium term. There will be more tie-ups at the project level. In fact for the developers, these will be testing times that will check whether they are strong enough to weather the downturn.”

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