Backed by strong residential sales and collections from customers, property developers are not utilising credit lines sanctioned by their lenders including banks, housing finance companies and non banking finance companies (NBFCs) for construction finance .
Construction finance is a Rs 1.25 lakh crore a year market in the country. Developers get construction finance at 8 to 11 % depending on their credit profile.
According to industry experts, top developers are not utilising 70 to 80 % of credit lines sanctioned by banks and other finance companies as they are posting record residential sales.
Housing sales across the top cities have hit record high in the third quarter of the calendar year, despite the usually slow monsoon quarter, and expected to touch decadal high this year, ringing the cash registers of property developers.
“The need for construction finance is down . Our construction finance lines are largely being unutilised. Developers are not using credit lines as sales and collections are very good,, ” said Amit Bagri, chief executive at Kotak Mahindra Investments, a non banking company of Kotak Mahindra Group.
He said their construction finance lines are not seeing utilisation of more than 25 to 30% of the sanction limits. “Repayments continue to come in thick and fast due to strong collections; hence the need for more new sanctions to grow the book,” he said.
Bagri said they are seeing this trend across cities such as Pune, Bangalore Hyderabad, Mumbai, NCR and so on.
A senior executive at a NBFC said :” Good developers have strong cash flows as sales are good. That is the reason they are not drawing down the sanctioned credit lines.”
Vishal Shrivastava, executive director at Anarock Capital said that earlier developers used to hold inventory and increase prices and sell later. Now most of the big developers are able to sell well and have a lot of money in their escrow account,.
” If they planned to increase prices by 5% and pay 10% interest rate for their loan, today they can sell at same price , forgo 5% escalation in prices but they prefer avoiding 10% borrowing cost.
Sanjay Dutt , managing director and chief executive of Tata Realty and Infrastructure said that developers could reduce the cost of debt if they don’t use credit lines. “If someone needs Rs 200 crore for a project but took only Rs 50 crore for construction, he can save interest costs on remaining Rs 150 crore ,” Dutt said
He added that when cost of debt comes down , their cost of construction will also come down.”When they have surplus cash, they can pay off expensive debt taken for land and other purposes,” Dutt said l.
“When company’s debt comes down, their credibility and credit rating will also go up,” he said .
Gopalakrishnan J, executive director and group chief financial officer, Shriram Properties said :”We use credit lines as needed from construction perspective even now, but it is true that the enhanced sales velocity and collections from such sales have reduced the need for drawing to some extent,.”
Gopalakrishnan said they have drawn 20-30% less than what they would have otherwise drawn but for robust sales. He said the trend has been happening more prominently in the last 12-18 months.
Sunil Pareek, executive director of Assetz Property Group, said that in the ongoing market upswing, sales collections are outpacing construction schedules.
For instance, when a project reaches the earth excavation stage, developers have already sold more than 30 to 40% of the available inventory. This results in a 15% surplus of total project collections, while the project incurs only 5 to 10% of the construction budget.
“Such a scenario naturally leads to an early-stage surplus of funds within the project, minimizing the need for pure construction finance. “he said
Pre-Covid, developers sought credit lines for construction and refinancing. However, in the current cycle, although credit and funding are readily available, top developers exhibit limited demand for construction finance. This shift can be attributed to the early-stage surplus in cash flow, added Pareek.
(with inputs from Ajay Ramanathan)