Real estate emerges as new investment destination for banks

Real estate has emerged as a hot investment destination with banks, as projects in other sectors of the economy have faltered, prompting banks to rush to fund commercial realty despite slow demand and inventory pileup.

Of the 173 projects of Rs 250 crore or more each that came for bank funding in the first half of 2013-14 , 53 were real estate projects that are estimated to cost nearly Rs 62,000 crore, which is almost one-fifth of the project cost. In terms of project cost, the sector lags only iron and steel, where the cost of 11 projects is around Rs 63,700 crore. But in terms of loans sanctioned so far, it tops the chart, accounting for a little under a quarter.

Funding for commercial real estate is in addition to home loans given by banks, which rose 19% to almost Rs 5,000 crore by Augustend , 2013 compared to August 2012.

Coming as it does in the midst of a slowdown, analysts send out a cautionary note. “If real estate exposure of banks is going up, then we need to take note. The market demand seems to be slowing down and the market risk is perceived to be higher. It’s a sector where there have been several ratings downgrades. But several projects are covered through lease rentals, which helps reduce the risk,” said ICRA managing director Naresh Thakkar. An executive at another rating agency warned of higher risks in lending to the National Capital Region, where a bulk of the projects seeking bank funding are coming up.

Bankers and real estate consultants, however, play down the concerns. “RBI has already put in several safeguards and with funding against rentals, things are much safer for banks. Besides , the sector offers them the possibility of earning a higher spread compared to telecom or pharma,” said Amber Maheshwari, managing director (coroporate finance ) at Jones Lang LaSalle, a leading real estate consulting firm. Bankers believe that funding real estate is not as risky as is made out to be.

“The funding requirement is much lower, at around 10% of the project cost, and the disbursement will be over the next five-seven years. In addition , it helps steel, cement and employment,” added Oriental Bank of Commerce CMD S L Bansal.

Source: The Economic Times

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