Indian homebuilders, facing the
highest borrowing costs in two years, are enticing homebuyers to
help finance projects as they work to revive sales and cut debt.
Developers including Mumbai-based DB Realty Ltd. and
Sunteck Realty Ltd. (SRIN) are offering to make buyers’ mortgage
payments while their home is being built in return for an
upfront deposit of as much as 30 percent that they’ll use to
help fund construction. Indian mortgage rates, among the highest
in Asia at about 10 percent on average, are still preferable to
rates for commercial-bank construction loans, about 15 percent.
“Developers are looking to counter a slowdown in volumes
through these schemes,” said Bhaskar Chakraborty, a Mumbai-
based analyst at brokerage IIFL Ltd. “Affordability in Mumbai
is the most adverse across major metros, with apartment-sale
registrations in the city languishing at a three-year low.”
Indian builders are struggling to reduce debt and increase
sales with interest rates near a two-year high and prices at a
record high in Mumbai, the country’s financial capital. With
sales slowing, the financing plans provide an incentive to
potential buyers, and immediate cash for builders. The combined
debt of India’s six largest developers climbed to a record 370
billion rupees ($6.8 billion) in the 12 months through March 31,
more than double the 158.8 billion rupees in 2007, according to
data compiled by IIFL.
Possible Tightening
Such financing plans, which tend to stoke demand from
property investors rather than those planning to live in the
purchased homes, could prompt further tightening measures from
the central bank, Chakraborty said. Investors, deferring
payments are betting on rising home prices to exit, when the
apartment is ready.
The Reserve Bank of India in 2010 asked banks to set aside
more money against loans on so-called teaser rates, where buyers
get discounted interest rates in the initial years. It also
capped housing loans at 80 percent of the property value, from
90 percent, as it sought to check rising home prices.
The financing options are being advertised as 20:80 because
homebuyers have to pay 20 percent of the value of the home at
the time of purchase, while lenders offer mortgages for a
maximum of 80 percent of the value. Builders agree to pay the
mortgage for up to two years, promising completion of the home
in that period.
The offer by DB Realty (DBRL), the worst performer on the National
Stock Exchange’s 10-member property index this year, allows
buyers to pay 19.9 percent of the cost when they buy and the
rest when the apartment is completed. Sunteck Realty is asking
for 30 percent of the home value upfront.
The property index slid 1.7 percent at 2:15 p.m. in Mumbai
trading. DB Realty fell 1.5 percent to 63.95 rupees, while
Sunteck climbed 0.2 percent to 416.85 rupees.
Mumbai Prices
The stock of unsold homes at new residential projects
climbed to a record in the quarter ended Dec. 31, as rising
prices crimped affordability in the nation’s biggest cities,
according to Pankaj Kapoor, founder of property research company
Liases Foras Real Estate Rating Research Pvt. Total unsold
inventory of residential stock in the six major cities tracked
by Liases Foras climbed to 100 million square feet (9.3 million
square meters), the highest since 2009.
Home prices in Mumbai, India’s most expensive real estate
market, rose to a record high at 11,626 rupees a square foot in
the quarter ended March 31, according to data from Liases Foras.
Construction delays present the biggest risk for homebuyers.
If the project isn’t completed within the two years, the buyer
will have to start making payments on a home they can’t move
into.
“For two years, the developer will pay the interest, but
the big assumption there is that the project will be
completed,” said Ambar Maheshwari, managing director of
corporate finance at property brokerage Jones Lang LaSalle India.
“If the project isn’t completed or is delayed, the bank will
come after the buyer, not the developer, in the event of a
default.”
Delayed Projects
Construction delays are rampant in India. Sixty-one percent
of developments in eight cities across India are not completed
on time, according to data from Liases Foras. Twelve percent are
delayed by more than two years, the data showed.
Developers are also raising prices as a tradeoff for paying
buyers’ mortgages.
Mumbai-based DB Realty is selling its Orchid Crown
condominium project in the city for 26,000 rupees a square foot,
while charging 25 percent more for customers opting for the
deferred-payment plan. DB is offering the option for all its
projects, with about a quarter of its sales being generated
through the plan, said Chief Executive Officer Vipul Bansal.
“We are seeing a boost in sales and this scheme is gaining
ground because it addresses the concern of delays in project
completion,” Bansal said in a phone interview from Mumbai.
“There is a separate charge for this financing. We calculate
the interest and add it on to the base rate to factor in the
interest costs.” Bansal said he wasn’t replacing bank
construction loans with mortgages and charges the higher rate to
customers to service loans on their behalf.
‘Incentivize Customers’
Sunteck, which is developing residential projects in Bandra
Kurla business district in the north of Mumbai, is offering the
deferred-payment plan as an incentive for buyers after raising
the price of the apartments at its Signia Oceans project in Navi
Mumbai, a planned satellite township developed in 1972, about 36
kilometers (22 miles) from the southern tip of Mumbai city. The
condominiums will be completed in about six months and the
company has enough funding to finish the project, said Chairman
Kamal Khetan.
“Since we have raised the selling price, we are offering
this plan to boost sales and incentivize customers,” Khetan
said in a phone interview from Mumbai, adding that Indian
developers typically start offering the so-called “80:20
scheme” when they struggle to sell apartments.
“We have negligible debt so we don’t need to do this to
raise money,” he said.
Debt Aversion
Even after the RBI cut funding costs in March for a second
time this year to 7.5 percent, rates are near a two-year high.
The central bank, which is scheduled to meet on May 3, has said
lingering inflation reduces the scope for further cuts.
Higher interest rates and a cultural aversion to debt
account for India’s relatively low home-loan penetration rates.
Home loan debt of $104 billion is equal to 8 percent of gross
domestic product compared with 20 percent in China and 77
percent in the U.S., according to data compiled by Housing
Development Finance.
India’s average mortgage rates compare with about 2 percent
in Hong Kong, 6.5 percent in China, and 6 percent in South Korea,
according to Credit Suisse Group AG.
Buying Time
The Wadhwa Group, which has teamed with Hong-Kong based
Langham Hotels International to create India’s first airport
transit hotel, has secured funding for one of its Mumbai
condominium projects by persuading enough buyers to opt for the
deferred-payment plan, said Chief Financial Officer Srinivasan Gopalan. In return, Wadhwa assumed liability for their mortgage
interest payments for the first two years, he said.
“Developers do not get a good interest rate,” said
Gopalan. By utilizing this payment plan, “I save about 300 to
350 basis points — that’s huge. It gives me complete financial
closure for the project and I am passing on this benefit to the
customers, too.”
Lenders including Indiabulls Housing Finance Ltd., Housing
Development Finance Corp. and ICICI Bank Ltd. are financing such
deferred-payment options.
“The main advantage is that the 20:80 plan allows
customers to better plan their cash flows,” Ashwini Kumar Hooda,
deputy managing director at Indiabulls Housing Finance, said in
an e-mailed response to queries. “The disadvantage to customers
is that in most cases developers hike the selling rate of homes
to factor in the additional burden of bearing interest during
construction.”
Homebuyer Nilesh Jani is betting that the financing is
worth the risk. He bought a 1,500-square-foot, two-and-a-half
bedroom apartment in Wadhwa’s Address project in Mumbai for 19.8
million rupees. Jani made the initial 20 percent down payment on
the house and is taking the remaining 80 percent through a loan
from ICICI Bank Ltd.
“I know I am paying a higher rate for this financing plan,
but it buys me some time,” said Jani, 42, who works for a
private equity firm in Mumbai. “It allows me to defer my
payments by two years, and hopefully in that period I will have
a higher salary and bonuses to help me make my payments.”
To contact the reporter on this story:
Pooja Thakur in Singapore at
pthakur@bloomberg.net
To contact the editors responsible for this story:
Andreea Papuc at
apapuc1@bloomberg.net;
Rob Urban at
robprag@bloomberg.net.
India Developers Enable Rate Break to Lure Homeowners
Dhiraj Singh/Bloomberg
Residential buildings stand on Nepeansea road in Mumbai. Home prices in Mumbai, India’s most expensive real estate market, are near a record high at 11,295 rupees a square foot, according to data from Liases Foras.
Residential buildings stand on Nepeansea road in Mumbai. Home prices in Mumbai, India’s most expensive real estate market, are near a record high at 11,295 rupees a square foot, according to data from Liases Foras. Photographer: Dhiraj Singh/Bloomberg
India Developers Enable Rate Break to Lure Homeowners
Dhiraj Singh/Bloomberg
A man cycles past Signature Island, a residential tower developed by Sunteck Realty Ltd., as it stands under construction in the Bandra Kurla complex in Mumbai on Sept. 27, 2011.
A man cycles past Signature Island, a residential tower developed by Sunteck Realty Ltd., as it stands under construction in the Bandra Kurla complex in Mumbai on Sept. 27, 2011. Photographer: Dhiraj Singh/Bloomberg
India Builders Get Rate Break and Lure Buyers: Mortgages
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