A slowdown in bank credit to commercial real estate development is not fresh news. But official data suggest that lending to realty sector is still growing in double digits. VCCircle has looked beyond the numbers to delve into the real reason behind the phenomenon as broad statistics would not gel with the listed realty players’ grouse that lending has virtually come to a halt.

According to the latest data available from the Reserve Bank of India, the outstanding for commercial real estate is Rs 1187.1 billion as of January 2012, a growth of 12.2 per cent over the year-ago period. Although this rate is lower than the growth figure of 19.9 per cent in the same period the previous year, the double-digit growth stands in sharp contrast to the claims from public-listed realty firms who say bank lending has shrunk considerably.

Central to the theme of continued lending to real estate development are the low-lying, unlisted property developers of the country – a crop of realtors who have always been on the sidelines of the big Indian realty story but who are slowly yet surely climbing up the ladder for a larger share of bank loans.

Sunil Mantri, chairman of , a Mumbai-based unlisted player, says that lending to real estate is still difficult and banks are giving finance very selectively. But he adds, “Listed players have already over-leveraged themselves and that’s why we expect more lending to happen in the unlisted space.”

According to a research report by IDFC’s Institutional Securities team last December, bank and NBFC loans to developers have increased 15 per cent to Rs 1.8 trillion for the 12 months ended September 11 in spite of higher interest rates and the RBI’s efforts to curb lending to the sector. Of this, loans to unlisted developers accounted for more than 72 per cent of the total.

The overall trend seems to be shift in lending from listed to unlisted players. The IDFC also suggests that the shift has only increased.

One reason for such a shift could be the hard targets that listed realty firms chase due to the pressure of being listed, with compulsory quarterly disclosures. Add to it the size of the firm and pressure points will become clearer. A listed firm usually places bigger bets with larger projects and when the market faces turbulence, project execution becomes a problem. This reverberates with pending projects and drying up of bank credit.

Rahul Saraf, managing director of Kolkata-based developer Forum Projects, says that banks have never declined to lend to his firm. “It does not make sense for a medium size company like us to get listed because unless we are a large-scale business, it will be difficult for us to demonstrate steady returns every quarter and launch projects at that level. Because investors will look for returns and numbers at the end of every quarter, you don’t want to be scrutinised on that basis unless one is a big player,” he said.

Even as most unlisted private developers are small realtors, there are some large private groups in different regions of the country. Given the huge set of private developers, even private equity developers have been betting on projects sponsored by such realtors.

In the last three months alone, real estate-focused private equity funds have infused close to $210 million in projects associated with unlisted realty players, according to VCCEdge, the financial research platform of VCCircle. These include firms like Mumbai-based Sheth Developers, 3C Universal Developers, Orris Infrastructure and Assotech Group from Delhi. Indeed, the bulk of the realty market is outside the universe of the listed companies. According to a report by Prop Equity, of the 6,547 projects launched in FY11, only 5 per cent had been done by the listed players.

Having said that, the big picture remains that lending to the realty market has slowed down. A senior real estate analyst, who did not wish to be identified, has pointed out that the 12 per cent odd growth is not something to be happy about as it does not even match the nominal GDP growth of around 15 per cent. “We need much more than this,” he added.

Ambar Maheshwari, managing director (corporate finance) at property consultancy Jones Lang LaSalle India says that banks’ lending is not completely frozen but is being streamed selectively and a major part of the lending is through lease rent discounting (LRD). “The sector is stressed and developers are finding it difficult to repay the loans, coupled with no new sales, particularly in Mumbai,” he adds.

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