Will External Commercial Borrowings Take Realty To The Next Level?

Real estate has been a sector that has faced a lot of issues over the past few quarters. These include higher mortgage rates, high debt burden, a marginal decline in realisations and declining volumes, which ultimately result in lower cash flows. The worries have continued unabated, and there was a dire need to address these problems.

Now, the UPA government, which is stepping up on the reforms front, is trying to provide some solace to the debt-laden realty sector. In view of an announcement made as part of the Union Budget 2013, the RBI has now decided to allow real estate players to avail of External Commercial Borrowings (ECBs) of upto USD 1 billion for low cost housing.This is good news for realty players, which have been reeling under high debt burden for a long time. ECBs are raised at comparatively lower rates than the prevailing rates in the domestic markets. This provision would provide much-needed liquidity to the cash strapped realty players.

According to the circular issued by the RBI, this facility can be availed by developers/builders, housing finance companies and the National Housing Bank. However, there are certain regulations imposed on the same, which we have enlisted going ahead. But first, let’s understand what exactly low cost housing is.

What Is Low Cost Housing?

According to the RBI’s guidelines, “A low cost housing project for the purpose of ECB would be a project in which at least 60% of the permissible floor space index would be for units having a maximum carpet area up to 60 square meters (around 650 sq. ft.).

We have certain reservations here, as the parameter to determine what comes under low cost housing is carpet area and not the per sq. ft. rates. In such a case, in Mumbai a project within the stipulated dimensions in a prime area priced at a rate of Rs 25000 per sq. ft. would also be termed as low cost housing – despite the unit being sold at a staggering Rs 1.65 -1.80 crore.

What Does The Development Spell For The Sector?

The circular also suggests certain other regulations for builders and developers to be eligible for funding from ECBs. While the minimum paid-up capital requirement is specified at Rs 50 crore, other important criteria are as follows:

• The developer should have minimum five years’ experience in undertaking residential projects
• The developer should not have defaulted on earlier financial commitments.
• Projects should not be under litigation.
• The funding cannot used for buying land parcels.

• The housing finance company should be registered with the National Housing Bank.
• It should have a minimum paid-up capital of Rs 50 crore or more.
• The minimum net owned funds for the past three financial years should not be less than Rs 300 crore.
• The net Non-Performing Assets (NPAs) shall not exceed 2.5% of the net advances.
• The maximum loan amount sanctioned to the individual buyer will be capped at Rs 25 lakh subject to the condition that the cost of the individual housing unit will not exceed Rs 30 lakh.

Our view on the circular is that it is positive step taken by the central bank. It would work to the benefit of not only realty companies, but also some of the housing finance companies.

There are a good number of listed companies in the realty space that are undertaking low cost housing projects, for eg. DLF, Omaxe, HDIL, Puravankara and Prestige Estates. We feel that this move will provide sufficient liquidity to complete the pending and delayed projects, and also to launch new low cost housing projects. Expect the realty index to stay in the positive zone in the near future.