As private equity firms and banks are adopting a cautious approach to funding real estate projects, non-banking finance companies (NBFCs) are coming forward to help cash-strapped developers with the expectation of higher returns, say experts.
Industry experts also say NBFCs are more keen on investing in residential projects than commercial units mainly because of lower risk and quicker returns.
"Currently sales are low in most of the major markets, which has impacted cash inflows. Developers who have earlier taken loans have repayment liabilities.
"Since they cannot take loans for repayment, they are now looking at NBFCs. These NBFCs are also coming forward to bail out developers to retire their loans," Knight Frank India executive director for capital transactions group Rajeev Bairathi told PTI.
After the recent RBI directives tightening bank funding to realty sector, banks have been very conservative on lending to real estate projects. Owing to several risks such as clearance issues and lower sales, as asset bubbles, PE firms are shying away from investing in real estate projects, he said.
The rates of interest charged by NBFCs are typically around 18-19 per cent for early stage financing and 15-16 per cent for inventory financing, which is more than 12-14 per cent of bank interest. PEs on the other hand expect 25-30 per cent returns on their investments.
"NBFCs are blending caution with keenness for lending to realty projects. Higher rates of interest, availability of hard assets as collateral, and ability to trap sales proceeds or cash flows in escrow accounts are principal reasons for NBFCs' interest in lending to real estate companies and projects," IndoStar Capital managing director and chief executive Vimal Bhandari said.
Along with the established players such as HDFC, DHFL, LIC Housing Finance and Kotak, there are a number of new ones such as Indostar Capital Finance set up by Ashmore Group, Piramal Capital, the NBFC set-up by the Ajay Piramal Group, the NBFC floated by the Xander Group, and Edelweiss Capital, which are active in real estate lending. MORE