India’s real-estate developers may face rising borrowing costs and shrinking access to credit, as record corporate lending slows amid a bribery probe that led to the arrests of eight executives.
The combination of the regulatory review and tighter central bank provisioning rules may cause rates on loans for developers to rise as much as 200 basis points, or 2 percentage points, by March, according to Kotak Securities Ltd. and Ambit Capital Pvt. Syndicated loans to companies fell to 140 billion rupees ($3 billion) in November, down from 199 billion rupees in October, and compared with 2.75 trillion rupees this year, the most since Bloomberg started compiling the data in 2002.
“The biggest casualty will be real estate companies,” said Shashank Khade, who manages funds for wealthy clients at Kotak Securities in Mumbai. “The lenient, benign environment for fund raising will end and life will become difficult as the cost of funds will increase.”
Property companies in emerging markets are facing rising loan costs as central banks tighten policy to guard against concerns that monetary expansion by central banks in Europe and the U.S. will fuel asset bubbles. Indian developers that had managed to repair balance sheets after the global credit crisis, may face delayed loan approvals, CLSA Asia-Pacific Ltd. and HSBC Holdings Plc wrote in notes to clients last week.
The average cost of debt at New Delhi-based DLF Ltd., India’s biggest developer, had fallen to about 10.5 percent from a peak of 12.6 percent during the crisis, Saurabh Chawla, executive director for finance, said in an interview in September. The company, whose average tenure of loans is almost four years, is the only developer that has sold corporate debt.
Federal Probe
DLF sold 7 billion rupees of 10.5 percent bonds maturing in 2013 in February, down from the 13.7 percent rate it paid to sell five-year bonds in August 2008. There are no prices available for the debt, which is unrated, according to data compiled by Bloomberg. DLF’s funding cost is higher than the 11.09 percent average for five-year BBB-rated Indian companies. The differencein yield between BBB bonds and similar-maturity government bonds is 321 basis points, near a two-year low.
The Central Bureau of Investigation is probing whether preferential treatment was given to developers including DB Realty Ltd. and Lavasa Corp. LIC Housing Finance Ltd., the property financing arm of India’s largest insurer, is at the centre of the investigation. Its Chief Executive Officer Ramachandran R. Nair and officials at the Life Insurance Corp. of India, Bank of India, Central Bank of India and Punjab National Bank were arrested on Nov. 24.
Government Bonds
Indian property stocks dropped last week to their lowest in more than a year, with the Bombay Stock Exchange’s 13-stock realty index dropping 26 percent in 2010.
Investors favored government fixed-income assets, driving the yield on the 10-year government bond down eight basis points this month to 8.04 percent. It rose three basis points today.
India’s bonds returned 0.7 percent this month, indexes compiled by HSBC Holdings Plc show, on slowing inflation and optimism economic growth exceeding 8 percent will help the government slash its budget deficit. The advance was the best performance among 10 Asian local-currency debt markets outside Japan tracked by Europe’s largest bank.
GDP Report
The government said today that gross domestic product rose 8.9 percent in the three months ended September, above the 8.2 percent median forecast of 30 economists in a Bloomberg survey. Wholesale-price inflation slowed to 8.58 percent in October from this year’s high of 11 percent in April.
China raised interest rates for the first time in three years in October and suspended mortgages for third-home purchases to cool property prices. Russia is facing a risk of “explosive” increases in real-estate prices, Prime Minister Vladimir Putin said in August.
Borrowing costs for Chinese developers have risen this month, becoming the worst-performing dollar debt in Asia. The yield on Guangzhou-based Evergrande Real Estate Group Ltd.’s 13 percent notes due 2015 rose 105 basis points to 11.90 percent this month, according to Royal Bank of Scotland Group Plc.
Worst Performer
The rupee is the worst performer this month in Asia excluding Japan, with a 3.4 percent decline to 46.05 per dollar. It fell 0.2 percent today. The cost of protecting the debt of government-owned State Bank of India, which some investors perceive as a proxy for the nation, rose 11 basis points to 174 this month, according to CMA prices.
The gap between India’s benchmark 10-year notes and similar-maturity securities in the U.S. shrank to 518 basis points today from 551 at the start of the month. The difference is up from 375 at the end of last year.
India’s Finance Minister Pranab Mukherjee asked state-run banks to review their loans to companies named by federal investigators. Last month, the central bank increased risk weightings for retail housing loans above 7.5 million rupees in its policy announcement.
Bank financing will now be subjected to more screening and approvals, forcing developers to rely on cash flows and sales of property to service debt, said Parikshit Kandpal, an analyst at Mumbai-based Ambit Capital. He expects short-term borrowing costs for the industry to climb between 100 basis points and 200 basis points.
“The ease with which developers can access and refinance existing loans will come into question,” said Krishnamurthy Harihar, Mumbai-based treasurer at the Indian unit of Johannesburg-based FirstRand Ltd. “Rates would also have gone up after the risk weighting was increased by the Reserve Bank.”
To contact the reporters on this story: Pooja Thakur in Mumbai at pthakur@bloomberg.net;Anurag Joshi in Mumbai ajoshi53@bloomberg.net
To contact the editors responsible for this story: Andreea Papuc at apapuc1@bloomberg.net; Sandy Hendry at shendry@bloomberg.net
