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Property developers in India are experiencing a unique situation where strong residential sales and large collections from customers have led them to underutilize the credit lines provided by banks, housing finance companies, and non-banking finance companies (NBFCs) for construction finance. The construction finance market in India is valued at approximately Rs 1.25 lakh crore annually. Even though developers can obtain construction finance at interest rates ranging from 8% to 11%, they are not fully utilizing their credit lines (approx. 70-80%), due to their exceptional residential sales performance.
Residential property sales in major cities have reached a record high, with the third quarter of the year outperforming expectations, which otherwise remains lacklustre due to the monsoons. This situation has resulted in property developers having substantial cash reserves, minimizing their need for construction finance. Amit Bagri, CEO of Kotak Mahindra Investments, noted that their construction finance lines are majorly unused, with utilization rates as low as 25-30% of sanctioned limits. The trend of underutilization is seen in cities such as Pune, Bangalore, Hyderabad, Mumbai and the National Capital Region (NCR).
Developers are benefiting from strong cash flows and they prefer not to draw down on their credit lines due to the low borrowing costs and high interest rates. As a result, they can sell properties at current prices without incurring higher borrowing costs associated with price escalations. Developers who use credit lines selectively can also reduce their overall cost of debt. These are used to pay off expensive debt, ultimately boosting their credit ratings and credibility. The surplus funds from early-stage sales are leading to a reduced need for pure construction finance.
Before the Covid-19 pandemic, developers actively pursued credit lines for both construction and refinancing purposes. However, in the present economic cycle, despite the accessibility of credit and funding, prominent developers are showing a restrained interest in seeking construction finance. This shift in the property market is due to the early-stage surplus in cash flow, making it easier for top developers to finance their construction projects without relying heavily on external credit lines.
This story was earlier published in Financial Express
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