High Percentage of Loans to Real Estate is Stress-Free
Shobhit Agarwal
Managing Director and CEO ANAROCK Capital
A study reveals that real estate – particularly the residential segment – has fared better than anticipated, points out Shobhit Agarwal, Managing Director and CEO, ANAROCK Capital
At least 67 per cent or approximately USD 67 billion of the total loan advances of USD 100 billion to Indian real estate by banks, NBFCs and HFCs is currently completely stress-free, reveals a latest study by ANAROCK Capital. Another 15 per cent i.e. approximately USD 15 billion is under some pressure but has scope for resolution with certainty on at least the principal amount. USD 18 billion or 18 per cent of the overall lending to Indian real estate is under ‘severe’ stress, implying that there has been high leveraging by the concerned developers who have either limited or extremely poor visibility of debt servicing due to multiple factors.
The pandemic has had a cascading impact across sectors, and severely stressed loans levels in Indian real estate were expected to go up substantially. However, real estate – particularly the residential segment – has fared better than anticipated. Towards 2019-end, of the total real estate loan of USD 93 billion, at least 16 per cent was severely stressed. Despite the devastation of the pandemic over the last one year, only 18 per cent of the total USD 100 billion loan value falls under this category. This is definitely far better than other major sectors such as telecom and steel.
Moreover, the entire severely stressed loan value in real estate is spread across more than 50 developers. In telecom and steel, default by a single company equals a sizeable portion of the overall stress in the real estate sector. Also, every real estate loan is backed by hard security, which is anywhere between 1.5 to 2 times. Even if the loan is NPA, there is enough security for the lenders to recover a significant portion of their money. The overall contribution of NBFCs and HFCs including trusteeships towards the total lending to Indian real estate is at 63 per cent.
Individually, banks accounted for the largest share of total realty loans with 37 per cent, followed by HFCs with approximately 34 per cent while NBFCs have 16 per cent and 13 per cent loans given under trusteeships. Interestingly, since 2013, the share of NBFCs and HFCs has grown considerably – at the expense of banks. However, in the past 4-8 quarters, banks have been more active than NBFCs. Of these, banks and HFCs are much better placed with 75 per cent and 66 per cent of their lending book in a comfortable position. Not surprisingly, nearly 46 per cent of the total NBFC lending is on the watch list.
Breakdown by City and Developer Grade
About 75 per cent of the total lending to Grade A developers is safe. This presents a comfortable outlook because out of the total loans given to real estate, more than USD 73 billion is given to Grade A builders. Of this, USD 55 billion is safe and under no stress. On the other hand, a high amount of realty loans given to Grade B and C developers needs strict monitoring. Close to 55 per cent of the loans given to Grade B developers is under severe stress; for Grade C developers, it is over 73 per cent.
In terms of cities, Pune and NCR are both high on stress with 40 per cent and 39 per cent respectively of the total loan given to them, followed by Mumbai with 37 per cent. Hyderabad, Kolkata and Chennai are well-placed with just 3-4 per cent stress; however, their overall share of the pie is limited. Bangalore with a 15 per cent share of overall lending has 76 per cent book with no stress at all.
Grade A developers are players that are currently active, with excellent execution track record, having developed real estate more than 3 million sq. feet till date. Grade B developers include those currently active, with an established execution track record having developable area of more than 1 million sq. feet but less than 3 million sq. feet. This category may also include players with excellent past execution track record but currently largely inactive. Grade C comprises players with less than 1 million sq. feet developed area.