NBFC and housing finance companies have always played a major role in the Indian real estate sector. However, this dependency is now expected to cost the sector heavily as the NBFC’s ongoing liquidity crisis is expected to hit hard small and the mid-level real estate developers.
The real estate sector has a strong correlation to credit availability, both in terms of retail borrowings and corporate debt. Any credit crunch in the economy or rise in interest rates impacts demand growth. And when it comes to the case of NBFC, which reportedly has accounted for 25-35% of incremental overall credit in recent years, the impact is expected to be bigger and worse.
In the scenario where real estate sales have been extremely slow and a substantial amount of projects are running behind schedule and banks are reportedly not willing to lend, NBFC credit crunch may just hamper the growth trend again. The sudden and sharp drop (20-30%) in share prices of real estate stocks, following the NBFC and banking sector meltdown, is, therefore, not surprising.
If NBFCs do not come through with their commitments, which they had committed in the first half of the year, the small and middle-level developers will soon find themselves in a fix as to how they are going to secure funding. The worst hit projects will be under-construction projects which are expected to get delayed or might be stalled due to lack of funds.
Several real estate experts have expressed their concern over the crisis.
“If NBFCs go down and do not fund the projects in the second half of this financial year, we see certainly a big problem coming with the developers as all other funding avenues have got closed,” Anuj Puri, chairman and country head, Anarock, told Money Control. “Sales is happening, but is insufficient to be able to bear the total construction cost of the project.”
The only silver lining in this whole situation is that buyers may expect further price correction. Also, big realty developers, such as DLF Ltd, Phoenix Mills Ltd, Oberoi Realty Ltd and Godrej Properties Ltd, which have trimmed debt or have reasonable presence in commercial or retail assets, or with a sizeable exposure to mid-income housing (where growth has been higher) could emerge stronger and more dependable as they are expected to weather the change.