RERA and GST have changed the contours of business, necessitating the complete financial closure of the project, since there is sales restriction before necessary approvals while taxation rules favor the purchase of fully constructed properties, a report said.
In wake of banks moderating their real estate lending growth due to issues related with asset quality and capitalization, the market share of NBFCs and HFCs would continue to expand in the real estate financing space, India Ratings report said. The ability to structure loans, low credit costs, collateral comfort and attractive yields along with regulatory arbitrage will help in loan growth of non-banking finance companies (NBFCs), the report said.
Nevertheless, rise in competition in the real estate sector has led to compression of yield by 150-250 basis points in wake of declining sales velocity in the residential real estate sector.
“RERA and GST have changed the contours of business, necessitating complete financial closure of the project, since there is sales restriction before necessary approvals while taxation rules favour purchase of fully constructed properties. Lending is typically backed by a cash flow cover, based on the certain assumption of sales velocity, price appreciation, timeliness of various approvals and completion schedule. However, Ind-Ra’s analysis shows that the cash flow cover falls significantly with adverse movements in these assumptions,” the report also said.
Frequent refinancing of the loan book also occurs due to high competition among NBFCs in the real estate, the report adds. In various cases, the take-out happens even before the moratorium period is over, with additional moratorium being offered by the new lender. It could also result in the masking of stress as the underlying sales velocity has declined.