Mumbai, NCR and Bangalore account for 80% of debt financing for real estate in last 5 years

India's real estate sector has debt financing opportunity of around Rs 14 lakh crore in the next three years, highlights a report by real estate company JLL and Propstack.

The report also highlighted that during the year 2018-23 the total debt sanctions of the real estate sector was at Rs 9.63 lakh crore.

The report pointed out that there is a good potential for lenders in the real estate market. It said that there is opportunity in two primary market segments, the construction finance or long-term debt, and Lease Rental Discounting, both are slated for good growth during the 2024-2026 period.

Upon analysing the sanctioned debt numbers across the top seven cities, Mumbai, NCR, and Bangalore accounted for 80 per cent of the total debt sanctioned in the last six years.

"In a competitive market like Mumbai, debt financing is capitalized for faster execution and quick turnaround of the projects to seize the prevailing opportunities. This also gives developers an edge to improve their scalability and market cap. While debt financing stimulates economic activity, creates jobs, and reduces housing shortages in metropolises like Mumbai, it also carries risks" said Niranjan Hiranandani, Chairman, Hiranandani Group to ANI.

He further added "Increasing financial leverage and interest rate volatility necessitate prudent financial management. Developers must strategically allocate resources and stay vigilant to sustain growth and capitalise on burgeoning demand".

The debt demand in the residential market will reach to nearly Rs 4.3 lac crore till 2026. Furthermore, the report stated that India's real estate construction market, comprising other asset classes like Grade A commercial office, high-quality malls, warehousing parks, and data centres, is collectively predicted to experience a 35-40 per cent growth trajectory over the same period.

The construction finance in India is dominated by the residential sector, accounting for approximately 70 per cent of the market. However, there is still a significant gap between the total residential construction debt requirement and the debt that has been sanctioned, indicating the underserved potential of the market.

Additionally, the LRD (Lease Rental Discounting) market in the commercial segment is expected to exceed a value of INR 800,000 crore by 2026. With strong demand fundamentals and sustainability measures in place, the LRD potential in the commercial office segment alone is expected to grow by 30 per cent in the next three years.

However, challenges such as the IL&FS and NBFC (Non-Banking Financial Companies) crisis in 2018 and the impact of the pandemic in 2020 caused a slowdown in the debt market. But the resurgence of the real estate markets from 2021 onwards has created new opportunities for lenders and borrowers alike.

The report highlighted India's real estate sector as an important contributor to the country's GDP growth, predicting significant potential for lenders in this burgeoning markets.

The study showed that the banking sector's participation has increased, accounting for 70 per cent of the total debt sanctioned in 2023, compared to non-banking sectors.Reforms in the real estate sector, such as the Insolvency and Bankruptcy Code (IBC), have instilled confidence among both public and private sector banks.

"In India's thriving real estate sector, lenders have a golden opportunity to capitalize on the momentum. Recent transformations, like RERA (Real Estate Regulatory Authority), GST, and REITs (Real Estate Investment Trust), have opened doors for increased lender participation.

Last year, Public and Private sector banks accounted for 68 per cent of total debt sanctioned, highlighting growing confidence and interest" said Lata Pillai, Senior Managing Director, Capital Markets, India, JLL.

The dominance of a few large players in debt financing poses challenges for aspiring developers. However, the demand for quality real estate assets and the sector's projected growth present opportunities for expansion and new players. Private credit providers, such as Alternative Investment Funds (AIFs), can play a crucial role in filling the financing gap and providing tailored solutions to borrowers.