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Realty Developers Getting Debt Deals at Lower Interest Rates
Too much money, too few deals. That's what is pushing non-banking finance companies (NBFCs) and private equity funds to further reduce interest rates on debt deals with real estate developers.
In the 18 to 24 months, interest rates for debt deals, which are mostly structured transactions, have dropped by 1-2%. For instance, transactions before 2014 were being inked by investors at anywhere between 19% and 20%. Since the mid of 2014, however, they have gradually come down to between 16.5% and 18%, say NBFCs and funds.
"There is a migration to back better quality developers and to finance better quality projects, which is leading to competitive pressures and, therefore, the rates are coming down," said Sanjay Grewal, chief executive officer of NBFC Altico Capital, which is looking to invest around Rs 2,500 crore in tier-I cities this year.
Grewal points out that there is a lot of liquidity coming into the sector and everyone is looking to finance good quality developers and projects in the same tier-1 cities, with very similar strategies. "This has pushed down interest rates between 1% and 2% in the last year and a half," he said.
Gurgaon-based builder Orris Infrastructure, for instance, had taken Rs 80 crore from Kotak Realty Fund in 2011-12 at 21%. In 2013, it took Rs 200 crore from Xander at 20%, using some part of the money to repay Kotak.
A few months back, Orris took Rs 325 crore from NBFC Indostar at sub 18% using it to prepay Xander. Recently, the builder again raised Rs 100 crore from NBFC Xander Finance at an interest rate of sub 18%.
The supply of debt has increased exponentially over the last two to three years as several new players, including the likes of Piramal, KKR, Altico, Indiabulls Real Estate BSE -0.68 % , IndoStar and others, ventured aggressively into funding real estate projects.
Diwakar Rana, managing directorcapital markets at property consultancy Cushman & Wakefield, said the nature of deals has changed since 2010-11, when builders were borrowing to enhance their profits by buying more land and starting new projects.