The housing finance market on the path of consolidation

India (SANEPR.com) July 11, 2008 -- Summary: The down ward trend of real estate market price is going down, the housing finance is facing a squeezed condition. Now the Banks have increased the contribution limit of the developers from 25% to 30%.

With the correction of prices in the real estate sector, commercial banks have become choosy in lending. They have become more cautious to finance to new residential and commercial real estate projects. Apart from increasing the housing finance rates, some of the banks have asked the real estate promoters to increase their share in project . This instruction is given to mitigate the associated risks associated with lending. The ongoing economic uncertainty and mounting inflation is likely to impact the immovable property prices. The impact is now visible in some metros.. The decline in real estate indicates tough times ahead for this industry. That is the reason why banks have already turned selective in taking up funding the new proposals.

The central bank has already declared the immovable property segment as a sensitive sector under its prudential norms. The sector is associated with higher risk weightage. Hence it has cautioned banks which have to set aside higher amount of capital for real estate exposure and has advised banks to closely monitor the housing finance rate .However, the apex bank made the point clear that there should not be a 100 per cent ban on extending housing finance to the existing clients. If the repayment pattern of the client is satisfactory, he should be offered housing finance at competitive rate.

In the current situation, Banks are also asking for higher contribution from the promoters and developers in a move to secure their position in the housing finance segment. They have made the contribution limit 30 percent. It was 25% earlier. The State Bank of India has initiated the move. As the contribution limit is extended, the promoters will now have a higher stake in project completion and housing finance repayment. Keeping with the rising cost of loans and the need for additional capital for risky assets of real estate sector in mind , the banks have increased the housing loan interest rate.

All the real estate companies are now bound to pay prime lending rates (PLR) for their new projects. The PLRs in case of most public sector banks is in the band of 12.25 to 12.75 per cent. However, lending was done at a PLR below 10 per cent rate last year. The Indian banking system as a whole gave Rs. 53,897 crore to the real estate sector as housing finance. The year-on-year growth in credit disbursement is 26.7 per cent (Rs. 17,361 crore) compared to 79 per cent (Rs. 18,770 crore) in 2007. The growth in the commercial real estate loan segment remained high.
The Indian economy is now facing slowdown across segments. The immovable property market is definitely heading towards the next phase of consolidation. Liquidity crunch in this sector is beginning to drive many mid-sized and small real estate developers to op for small housing finance. Many of the developers of small and medium size are in the process of liquidating their land and incomplete projects by selling them to bigger developers or private equity players even at lower land valuations.

In real estate market, there is no alternative to credit. Land transactions have dried up due to the higher housing finance rate and squeezed credit scenario. The fund-raising capacity of developers have also changed and some have limited their expansion plans, in the squeezed situation. The smaller developers, also fear that their project might get stuck due to unavailability of adequate funds. The bank credit had already dried up for small and medium size developers and they now fear rising interest rate will hamper their growth. In short the housing finance and housing finance rate in India are on the way of consolidation.