Govt ban on overseas debt hits realty
By curbing overseas loans to developers, govt wants to cool land prices that have as much as tripled in 3 yrs.
By Agencies |
NEW DELHI: Unitech Ltd, India's most valuable real-estate company, and Parsvnath Developers Ltd. will have to pay more for loans because of a ban on overseas borrowing, forcing them to incur the highest interest costs in five years.
The finance ministry's May 18 ruling will push up Unitech's funding charges at least 5 percentage points, Managing Director Sanjay Chandra said. Parsvnath was quoted 14 percent interest on a loan from an Indian state-owned bank, Chief Financial Officer Ravi S Pani said.
By curbing overseas loans to developers, the government wants to cool land prices that have as much as tripled in three years and driven the rupee to a nine-year high. Still, higher costs may deter builders from constructing the 10 million housing units a year India is estimated to need by 2030, according to the Asian Development Bank.
``I don't understand why the government has throttled this avenue and singled out the real-estate industry,'' said N K Ahuja, chief financial officer at Eldeco Group, a New Delhi-based developer with at least Rs 35 billion ($860 million) of projects. ``We were looking at raising funds through this route but now we'll end up paying fancy interest rates to domestic lenders.''
Indian builders need loans to buy land, steel and cement as Asia's fastest wage growth makes homes more affordable. The Reserve Bank of India, the nation's central bank, asked banks to curb loans to the real-estate sector, making it harder for developers to obtain cheap financing.
The finance ministry's May 18 ruling will push up Unitech's funding charges at least 5 percentage points, Managing Director Sanjay Chandra said. Parsvnath was quoted 14 percent interest on a loan from an Indian state-owned bank, Chief Financial Officer Ravi S Pani said.
By curbing overseas loans to developers, the government wants to cool land prices that have as much as tripled in three years and driven the rupee to a nine-year high. Still, higher costs may deter builders from constructing the 10 million housing units a year India is estimated to need by 2030, according to the Asian Development Bank.
``I don't understand why the government has throttled this avenue and singled out the real-estate industry,'' said N K Ahuja, chief financial officer at Eldeco Group, a New Delhi-based developer with at least Rs 35 billion ($860 million) of projects. ``We were looking at raising funds through this route but now we'll end up paying fancy interest rates to domestic lenders.''
Indian builders need loans to buy land, steel and cement as Asia's fastest wage growth makes homes more affordable. The Reserve Bank of India, the nation's central bank, asked banks to curb loans to the real-estate sector, making it harder for developers to obtain cheap financing.
Lack of Funds
``More than interest rates, the concern for developers is the availability of funds,'' Unitech's Chandra said in an e-mailed response to questions. Unitech was about to complete an overseas loan when the finance ministry changed the rules, he said.
The Reserve Bank of India has raised its key overnight lending rate six times in the past 1 1/2 years to slow record bank lending. India's central bank also raised banks' reserve requirements three times since December to curb loans growth.
``Indian banks are not in a position to meet the funding requirements for large projects being undertaken by the bigger developers for various reasons, single borrower limits, high risk weights for real estate lending,'' Chandra said.
Shares of Unitech fell Rs 3.15, or 0.6 per cent, to Rs 504.3 at 11:43 am on the Bombay Stock Exchange. Parsvnath declined 1.1 per cent to Rs 314.5, while Ansal Properties & Infrastructure Ltd fell 3.6 per cent to Rs 288.
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Raising Rates
Indian lenders including ICICI Bank Ltd and Housing Development Finance Corp raised rates on home loans, deterring buyers from purchasing smaller properties, DLF Ltd. Vice Chairman Rajiv Singh said last month. DLF yesterday started India's biggest initial public offering, seeking $2.4 billion to buy land without incurring too much debt.
While the government estimates that $320 billion of investment will be needed to build roads, ports and bridges by 2012, it is curtailing debt flows into the sector to stem gains in the local currency and guard against a property bubble.
Parsvnath, which is building malls at New Delhi's metro rail stations, plans to borrow 20 billion rupees in the next two years to buy land and build homes, Pani said.
He rejected the Rs 2 billion loan offer from the state-run bank because of the high interest rate, he said, without identifying the bank. Overseas rates are lower.
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`Compromise on Costs'
``The rule will force us to compromise on borrowing costs,'' Pani said in an interview in New Delhi, where the company is based. ``It will also impact us as far as timely generation of the funds is concerned.''
Parsvnath plans to raise Rs 5 billion in the next three months, Pani said. The company, which is developing 153 million square feet (14.21 million square meters) of townships, shopping malls and trade zones in 17 states across India, aims to invest as much as 50 billion rupees in the next two years and will meet the remaining Rs 30 billion of capital requirement from its own cash reserves and partnerships with investors, he said.
India's $12 billion real-estate industry is growing 30 per cent a year, according to Ernst & Young LLP. The nation faces a shortage of 24.7 million housing units in urban areas, according to the housing ministry. India's urban population is expected to rise to 461 million by 2025 from 286 million.
Indian companies want to tap overseas lenders because the benchmark rate for companies borrowing in London is more than 3 percentage points lower than the comparable rate in India. The six-month dollar-denominated London Interbank Offered Rate is at 5.33 percent, according to data on the Bloomberg. The comparable money-market rate in India is 8.75 per cent.
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High-Risk Loans
Indian Finance Minister Palaniappan Chidambaram on April 19 asked state-run banks to slow lending to high-risk businesses including real estate.
``Definitely, the ban will have an impact on the real-estate companies as the Reserve Bank of India has blocked all the avenues for real-estate developers to raise the funds at a cheaper rate,'' said S N Gupta, chief financial officer of Era Constructions (India) Ltd. ``We were having certain plans to raise the funds for our real estate company in the overseas market but won't be able to do it now.''
The company plans to raise as much as Rs 6 billion in the fiscal year ending March 31, he said.
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