The credit flow to real estate, from both banks and private channels, has significantly grown as residential sales boom and the office property market on the mend.
Bank credit to the commercial real estate sector stood at Rs 4.38 trillion as on January 26 this year, up 36% YoY, according to recent Reserve Bank of India data. The growth was 8% YoY in January 2023.
Credit to the residential real estate sector is expected to grow 15-20% in both the current and next financial years. In FY23, it was at 17.3%, according to India Ratings and Research. Banks’ exposure to the the sector continues to increase in FY24, according the rating firm.
“The agency has observed strong sales momentum in FY24. While it is likely to taper down into FY25 due to a high base, it will remain moderately positive. All micro markets saw an uptick in sales, led by the National Capital Region and Hyderabad,” India Ratings said.
Saurabh Shatdal, managing director, capital markets and head – retail, India, Cushman & Wakefield, said strong demand drivers have encouraged developers to take fresh projects which has created a high-quality supply pipeline. “High growth environment, coupled with stable geopolitical situations and encouraging macro and micro economic indicators, creates an ideal opportunity for any financial institution to participate in the growth by funding such developments, and the 36% YoY growth just reflects that.”
Shatdal said the outlook for the credit growth to real estate remains strong. “We are seeing encouraging demand across asset classes. The improving credit profile of developers driven by better cash-flow visibility would encourage banks to extend larger credit to the industry.”
Vishal Shrivastava, executive director at Anarock Capital, attributed the growth in bank credit to ample liquidity and changing dynamics in residential real estate. “Residential sales were all time high last year and everybody was able to sell their stocks. Since big developers did not want funds for construction and land buying, banks structured lending to suit their requirements. They also focused on tier-II & III cities to deploy their funds.”
He added as the largest real estate lender, HDFC, merged with the HDFC Bank, competing banks had to raise their game and start lending aggressively for gaining market share.
Sanjay Agarwal, senior director at CareEdge Ratings, said the real estate sector has witnessed positive changes in the last six-seven years, especially after the RERA norms set in. “Bankers now have data to assess credit worthiness of a project. Builders also have to commit to the project completion deadline to access bank credit. They must deposit the credited money in bank account and cannot take it out for other purposes…”
The RBI is also putting restrictions by saying lenders cannot fund initial stage construction projects, leading to an improvement in the quality of underwriting, Agarwal said.
Private credit
Real estate is also garnering a large share of private credit flows. According to REDD, a data and research provider, the realty sector bagged the highest amount of private credit volume at 29.5% in 2023. Investments in real estate stood at $1.7 billion in 2023, compared with $1.6 billion in 2022, EY said in its latest private credit report.
According to the private credit survey of EY, 50% of fund managers believe that the majority of deal activity will happen in the real estate sector, closely followed by manufacturing. Interestingly, real estate is also perceived as the riskiest sector in the current private credit portfolio.
CW’s Shatdal said since banks and NBFCs take the lead position to fund construction finance requirements for developers, there exists a huge opportunity to fund the costs pertaining to approvals and land acquisition for developers whom lenders can’t fund. “These approvals and land costs account for more than 30-40% of the total development spends, and pave the way for structured and private credit opportunities. “The market for such opportunities is also maturing. As developers continue to seek growth capital, we feel structured private credit would be a constant component in the capital stack for a lot of developers,” Shatdal said.