Lifeline of the largest bank in India offers hope to defeated builders
NEW DELHI: The besieged developers in India see a glimmer of hope after the country's largest bank announced a program that could unblock strangled financing lines for the real estate market.
The State Bank of India said Wednesday that it will finance both builders and homebuyers, charging developers a premium and offering the latter a refund if their apartments remain unfinished. While Sunteck Realty Ltd will initially partner OSE , Poddar Housing and Development Ltd said it will contact the lender on Monday and others said they could join in the coming months.
This is the first time a bank is responsible for the completion of the project, Rohitashwa Poddar, managing director of Poddar Housing, said by telephone. It is a very large movement.
The weakest economic growth in a decade is affecting the demand for apartments, even when a crisis among shadow lenders squeezes financing for developers, leaving them unable to finish projects and sometimes forcing existing buyers to get down to the work and complete the construction of their own houses. The largest bank in the nation that now intervenes as an intermediary, after a government movement to establish a fund to complete stagnant projects, can help restore confidence.
Sunteck Realty’s shares jumped 6.6% on Thursday, the biggest gain since August, after it was named as OSE’s first partner.
Vikas Oberoi, chairman of Oberoi Realty Ltd, said that though his firm doesn’t need project finance it “will be happy to tie up with OSE under this scheme so our buyers feel additionally secured.”
Mumbai-based developer Ekta World may consider the plan in future, chairman Ashok Mohanani said by phone. Other banks may also follow OSE, he said.
Under the program, OSE will lend developers across seven cities as much as Rs 400 crore ($ 56 million) for apartments priced as much as Rs 2.5 crore. OSE will only fund those with a good credit score and strong track record of completing projects, chairman Rajnish Kumar told a business channel, adding that developers will be charged a premium while home-loan customers can avail existing rates.
OSE’s loans for so-called affordable housing projects carry an interest rate of 10.5%, which would rise under the new program, while non-bank financiers already charge more than 18%, Poddar said.
According to Anarock Property Consultants, housing sales growth in the seven major cities slowed to 5% in 2019 from 17.6% a year ago. Approximately Rs 1.15 lakh crore of capital may be stuck in 350 large stagnant projects in Indian cities, estimates Citigroup Inc. In November, the government announced a fund of Rs 25,000 million to save stuck residential projects.
OSE may also have tied up with mortgage guarantors to insure itself against risks, said Pankaj Kapoor, managing director at property-research firm Liases Foras. The lender can cover about 30% of India’s real estate market under this program, estimates Kapoor.
Slower sales are the biggest problem for developers and the new financing method will address this problem, Kapoor said. It will bring back trust.