NBFCs are now also shying away from refinancing maturing debt of large developers to limit concentration risk to the sector.
The ongoing liquidity crunch faced by non-banking financial companies (NBFCs) and housing finance companies (HFCs) is set to hit real-estate developers the most, rating agency Fitch said in a report on Friday.
Developers that rely on refinancing from NBFCs, especially those with weak financial profiles, will be affected the most if the present conditions persist. “The availability of unencumbered assets among large developers may be of limited use, as NBFIs are looking to shed their already-high exposure to the sector, especially to large borrowers,” analysts at Fitch wrote in the report.
NBFCs have disproportionately increased their share of real-estate sector credit in the past few years amid heightened risk aversion by banks. Banks themselves have been cutting exposure due to their own funding challenges that began in late 2018 and have become more acute over the past few months. Domestic bank exposure to real estate fell to 2.3% of loans in FY19 from 2.8% in FY16.
NBFCs are now also shying away from refinancing maturing debt of large developers to limit concentration risk to the sector. This is pushing developers towards alternative funding channels, such as private equity. “The availability of such funding could be more limited than the value of maturing debt and may only be available to established developers with sufficient unpledged assets. It would also come at a higher cost. We believe banks may still consider exposure to quality real estate, but overall exposure continues to decline,” Fitch observed.
Developers that are focused on high-end projects may face higher risk as sales of such projects have slowed in the last two years. “We believe these developers would be wary of taking sharp price corrections on unsold inventory to boost sales, except in extreme circumstances, as this could diminish the value of unsold inventory and weaken collateral cover for existing lenders,” the report said, adding that any boost in sales would be temporary.
Meanwhile, developers with substantial exposure to affordable housing may still benefit from marginal access to lenders in light of healthy pre-sales growth, supported by India’s substantial housing deficit and government incentives for buyers via the credit-linked subsidy scheme (CLSS) as well as for developers, including tax deductions and grant of infrastructure status, which entitles companies to some benefits and concessions.