Banks turn aggressive in commercial real estate loans

By Bricksnwall | 0000-00-00

The CRE portfolio of scheduled commercial banks increased by a healthy 22.94% year on year (yoy) as of March 22, 2024, compared to 8.52% on March 24, 2023. Stronger regulations, deleveraging by listed developers, and the introduction of real estate investment trusts (REITs) all encourage lending to the sector.

Stronger regulations, deleveraging by listed developers, and the introduction of real estate investment trusts (REITs) appear to have pushed banks to abandon their cautious attitude to lending to the commercial real estate (CRE) industry.

This is demonstrated by the fact that the CRE portfolio of scheduled commercial banks (SCBs) increased by a healthy 22.94 percent year on year (yoy) as of March 22, 2024, compared to 8.52 percent as of March 24, 2023, according to recent RBI statistics.

SCBs increased their exposure by ₹74,006 crore from March 24, 2023, to March 22, 2024, compared to ₹25,342 crore between March 25, 2022 and March 24, 2023.

As of March 22, 2024, SCBs has an outstanding CRE portfolio of ₹3,96,579 crore.

Banks' CRE portfolios include loans extended to builders for the construction of any property intended to be sold or leased, loans for multiple houses intended to be rented out, loans for integrated township projects, exposures to SEZ development, and exposures to real estate companies, among others.

Along with the capital market (direct and indirect), RBI considers banks' exposure to CRE to be sensitive, requiring them to set aside more capital to lend to firms in this sector.

Sanjay Agarwal, Senior Director, CARE Ratings, observed that the overall scenario for the CRE sector has improved significantly in the last few years, with many regulatory changes -- REIT (Real Estate Investment Trust) is gaining ground (equity capital is being brought into the system), and RERA (Real Estate Regulatory Authority) is providing a lot of sectoral data -- and real estate players having lower leverage than before.

"So, the banking system now has a high level of confidence in this area. CRE is a significant sector, and banks are increasing their exposure. He predicted that Banks' CRE portfolio will continue to rise strongly in the next years.

Agarwal emphasized that, traditionally, in the event of a default, the CRE sector has the largest recovery from assets due to the presence of active buyers and sellers. As a result, the loss due to default is low. Given the asset(s)' security, the returns are favorable.

Prashant Sharma, President of the National Real Estate Development Council of Maharashtra, stated, "We are seeing a huge positive shift in the financing environment of the CRE industry. This is a strong indicator of the sector's increasing stability and popularity. The substantial increase in bank loans to CRE demonstrates a restored confidence among lenders. This spike demonstrates growing confidence in the sector as a viable investment."

This favorable trend is largely backed by RERA's transparency and regulatory clarity, which has not only instilled confidence in stakeholders but also shortened approval processes, making it easier for developers to deliver projects on time, he noted.

Sharma emphasized that reputable developers' commitment to meeting deadlines and maintaining quality standards has played an important role in drawing greater institutional finance to the sector.

According to Himanshu Jain, VP - Sales, Marketing & CRM, Satellite Developers Private Ltd, "This trend (of increased exposure of banks to CRE) is a positive indicator of the robust confidence that financial institutions have in the potential of CRE as a viable and profitable investment."

He believes that, despite the generally greater risk weight associated with CRE loans, banks are boosting lending for a variety of reasons, including rising demand for commercial space, which is being driven by the economic recovery and post-pandemic company development.

 

Second, improved regulatory conditions and clearer tax structures have increased the transparency and attractiveness of CRE investments.

Furthermore, the introduction of REITs has given banks an organized and secure way to participate in the real estate sector, minimizing some of the inherent risks.

"This, together with competitive interest rates and banks' strategic focus on diversifying their portfolios, has greatly influenced the present lending environment. We consider this trend as a positive indicator of economic growth and evidence of CRE's long-term appeal as a key asset class," Jain said.

Global institutional investors have regularly invested an average of $4 billion per year in the Indian real estate sector over the last five years, according to property consultant Colliers. The office sector has got half of the total sum.

Leading APAC countries such as Singapore, Hong Kong, South Korea, and Japan are also looking into India's expanding real estate industry. In 2023, investment inflows from APAC increased by 57% year on year to $1.8 billion, with office assets accounting for 70% of the total.

Continuing the momentum, institutional investments in real estate reached $1 billion in the first quarter of 2024, with the office sector accounting for 57%.

Source: TheHindu Business Line