If banks are allowed to fund land purchase, properties will become affordable

Banks are not allowed to lend to developers for purchasing land parcels.

While developers agreed with HDFC Chairman Deepak Parekh’s call to allow banks and housing finance companies to fund purchase of land, private equity managers say they are best suited for the job.

Developers said if banks and housing finance companies are allowed to fund purchase it would reduce their costs and make properties affordable.

Normally, banks lend to developers at 13-15 per cent, PE firms at 20-26 per cent and non-banking finance companies (NBFCs) at 16.5-18 per cent.

Banks are not allowed to lend to developers for purchasing land parcels.

This is because the Reserve Bank of India felt it would lead to speculation in real estate, said Rajeev Talwar, chief executive officer at DLF, the country’s largest developer.

However, PE firms and NBFCs have no such restrictions.

In his annual communication to shareholders, Parekh said PE firms and NBFCs were charging exorbitant rates of interest for financing purchase of land. 

“If loans for land buying are available at low cost, it is advantageous for developers. But it should be seen that such loans do not make way for speculative activities,” said Talwar.

J C Sharma, vice chairman at Bengaluru-based Sobha Developers, said if land is considered raw material, loans for buying this should come at a low cost to make properties affordable.

“Even in case of defaults, you have land as an underlying security, unlike loans to other segments,” Sharma added. He said PE firms have been charging high rates of interest for a long time. “Nobody is giving equity. It is private debt,” he said.

Sunil Rohokale, managing director at Mumbai-based fund manager ASK group, said the risk associated with investments during the land aggregation and approval stages justify higher rates for private equity.

Rohokale said it takes developers a lot of time to obtain approvals after buying land.

If they take a bank loan at this stage, it would be difficult to service interest costs.

He added bank loans can be sought after the developer gets approvals and loans from PE firms at the time of acquiring land. 

However, S Sriniwasan, chief executive at Kotak Realty Fund, said irrespective of whether it is banks, PE firms or NBFCs lending capital, the risk of extending loans at the land acquisition stage is extremely high because of title risk and the risk of not getting plans and permissions in time for the project to generate cash flows.

Photograph: Reuters