Hit by an acute cash crunch, some of the top property developers in Mumbai are borrowing funds at four per cent interest a month from private moneylenders and investors to meet their yearly debt repayment and tax obligations, say industry players and property consultants.
Although developers used to borrow funds at 2-2.5 per cent a month at the fag end of the year, the rate has touched a new peak of four per cent a month -- cumulatively, 48 per cent per annum.
Moneylenders and investors are demanding higher rates from developers, given the strong demand for short-term funds and tight liquidity conditions.
According to property market sources, funds to the tune of Rs 500-600 crore (Rs 5-6 billion) have flown from these informal channels to builders in the past two-three months in Mumbai.
A developer, who operates in South Mumbai and is into redevelopment of projects, borrowed around Rs 70 crore (Rs 700 million) in January to meet debt repayment obligations.
Another in the western suburbs of Mumbai and a pan-Maharashtra developer have borrowed funds in large chunks, according to sources.
Money is said to be lent by wealthy diamond and wine merchants, moneylenders, politicians and high net-worth individuals, who ask for two-three times the cover to the amount lent.
Therefore, if a developer has five-six apartments valued at Rs 10 crore (Rs 100 million), he could get a loan of Rs 5 crore (Rs 50 million).
The tenure is one-three months and brokers are hired to get funds from moneylenders and investors.
Even as brokers get hefty commissions, the onus of prompt repayment also lies with them, say sources.
Says Amit Goenka, national director, capital transactions, Knight Frank, "Developers have many obligations to meet and secured
Besides, the current borrowing season has also seen a rise in mortgages by developers with moneylenders and investors.
"Mortgages have gone up.
"Developers are mortgaging their assets and borrowing funds from investors as the latter are not buying properties," says Sandeep Runwal, director, Runwal Group, a Mumbai-based developer.
According to estimates, developers needed to repay a total of Rs 20,000 crore (Rs 200 billion) to banks in March 2011.
Although big developers such as DLF and HDIL are selling land parcels and development rights to repay loans, smaller ones have to depend on informal sources of money, say consultants.
Recently, HDIL sold a land parcel in the Andheri suburb of Mumbai to Adani Enterprises for Rs 900 crore (Rs 9 billion).
DLF, the country's largest developer, has been looking to sell a land parcel in Mumbai and Aman Hotels for some time to reduce its Rs 22,000-crore (Rs 220-billion) debt.
"Both banks and NBFCs (non-banking finance companies) are shying away from lending to over-leveraged developers.
"PEs are also sceptical, which is why these developers are knocking on the doors of moneylenders," says a chief financial officer of a Mumbai-based developer.
V K Sharma, chief executive of LIC Housing Finance, says, "We have not seen any spurt in lending to developers. We are conservative in lending to real estate. We only lend to developers who meet our terms."
Besides, some developers are increasingly resorting to bulk sales to get cash flows.
"The sale we have done in the month of March 2012 is equivalent to what we did in the last 14 months," said a developer in South Mumbai.
On buying a minimum of three apartments, the buyer gets a discount of 10-20 per cent.
