The real estate financing and processes in India are undergoing a change, as property developers in the country have received increasingly larger amounts as credit from the banking sector since the COVID-19 pandemic. According to data on sectoral lending from the Reserve Bank of India (RBI), net loans by commercial banks to the real estate sector increased 3.5 times in 2021 over that in the previous year. The low-interest rate environment and loose lending standards are to blame for such increase.
With an accounts receivable disbursal of INR 299140 million or 75% of all disbursals in 2021, the high growth trend persisted in the first five months of 2022, according to the RBI. Notably, the real estate market value in India has been steadily increasing over the past six years, from $101 billion in 2017 to $145 billion in 2022, according to GlobalData.
The financiers returned because of sector consolidation and cleaning up, besides the strong sales momentum as is evident currently. In accordance with the anticipated demand, the momentum in the disbursal is expected to continue. However, if interest rates become more rigid, developers would be beset with higher borrowing costs.
Post-Pandemic Comeback of Residential Real Estate Market
Developers could turn to investment firms for equity capital and even sale of assets because of the 140-basis point hike in policy rates and the ensuing increase in borrowing costs.
After the end of the pandemic, the housing real estate market staged a comeback. Despite the talk about work-from-home and hybrid work models accelerating the growth cycle, the office sector recorded 26 million ft2 of net absorption in 2021 in addition to strong housing sales momentum, according to the RBI.
Developers reported improvement in cash flow due to the strong home sales. The development industry was able to obtain low-interest rate credit from the banking sector owing to the developers’ stronger balance sheets, and this is evident from the increase in net credit disbursals. The reduced lending rates are expected to benefit real estate developers for a short duration since they started to increase in tandem with the RBI’s three sequential increases in the repo rate since early May.
Due to the increasing costs of borrowing brought on by the tightening of monetary policy, developers could be obliged to hunt for funding through different channels such as institutional investors.
The sharp decline in net credit loan disbursement—from INR29,656 billion in 2019 to INR11,274 billion in 2020—led to the real estate market’s all but complete standstill throughout the pandemic, according to the RBI. Due to the pandemic, work on projects was put on hold, and construction financing dried up. The situation changed in 2021 with conditions gradually returning to normalcy.
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