News: Wary Indian banks open doors to property firms

(RTR 01/08/2006) Hong Kong - India's banks are starting to open their doors to developers but remain wary about the risks of a fast-growing but young property market, making loans expensive and difficult to come by.

India eased rules on inward investment in the construction industry early last year, unleashing a wave of activity and a flurry of deals involving foreign funds.

The property industry is shedding a shady image of self-financed wheeler dealer developers. Young businessmen are eager for bank borrowing to help lure foreign partners and turn plots of family land into offices, shopping centres and housing befitting an economy growing at more than 8 percent a year.

But industry professionals complain banks have been slow to adapt.

Prospective foreign investors, such as U.S. shopping mall developer Taubman Centers Inc., are also keen to borrow locally but balk at the personal and corporate guarantees on loans often required by Indian banks.

"The immaturity of India's debt markets is one of the most constraining conditions of investing there," said Taubman's Asia president, Morgan Parker. "It's not only the requisite guarantees but the cost of debt and low leverage that make Indian sourced real estate debt generally unattractive."

On the equity side, India's regulators are allowing real estate mutual funds (REMFs) to set up to channel much needed capital into the property industry.

But traditionally, the central bank has tried to steer banks away from lending too heavily to the property sector, wary that banking systems in other developing countries, such as Thailand, have nearly disintegrated because of property market crashes.

Property project funding by Indian banks adds up to $1.8 billion, about 1.5 percent of outstanding bank loans, according to the Reserve Bank of India. In comparison, Chinese bank exposure to developers in a private property market barely a decade old is worth $114.7 billion, 4.7 percent of total loans.

MURKY TITLES

Banks are especially wary of murky land titles in a country lacking a centralised title registry, and land disputes are hotting up as property prices soar. Projects can also get tied up in red tape, and few developers have proven track records.

One of India's newest banks, Yes Bank Ltd., says it is leading the way in property project lending, together with ICICI Bank and UTI Bank.

Some 12 percent of Yes Bank's loans have been to developers, and around a third of those are non-recourse loans, which are priced just on projected cash flows with the property as collateral and do not require personal guarantees.

The bank, with outstanding loans of $750 million after two years, aims to double its business each year. Many of its property loan deals are syndicated to other banks.

"We're the active players, the rest are frankly followers," said Yes Bank's president for corporate finance, Samak Ghosh.

"They don't have the skills to do the loans on their own, the risk analysis. They trust us, and when we do a deal they come in on the back of that."

Yes Bank's non-recourse loans carry an interest rate of around 12.5 percent, and are typically given for residential projects promoted by local governments, where land titles tend to be more secure, Ghosh said. Tenors are 30-40 months for residential projects but 7-8 years for commercial projects.

Loans with personal guarantees are charged at a 10.0-10.5 percent rate, compared with an interbank rate of 6.1 percent. Chinese banks lend to small developers at around 6.0 percent, but offer much lower rates to listed developers.

FOREIGN LOBBYING

Loan to value (LTV) for a project in India is typically 65 percent, similar to emerging property markets such as China, but much lower than developed markets such as Japan or Hong Kong.

"In an emerging market one expects more volatility in property prices. LTV needs to be lower and interest rates high," Ghosh said. "But after factoring in India risk, my belief is there is still enough value for everybody."

Foreign players like Wall Street firm Morgan Stanley and U.S. pension fund CalPERS are scouring India's property market for opportunities, drawn by internal rates of return on development projects of at least 25 percent.

Shobhit Agarwal, head of investment division at property services firm Trammell Crow Meghraj, said foreign investors were lobbying for non-recourse loans from established banks, such as State Bank of India, Bank of Baroda and Union Bank of India.

"It's a barrier, but the markets are opening up," he said.

"Non-recourse loans should be widely available in India sooner or later, I think in two or three quarters. It will allow foreign institutional investors to come in much more smoothly."