Lease rental discounting rates lowest in 10 years for top realtors

Fall 200 bps in 24 months as banks struggle to deploy credit

Lease rental discounting (LRD) rates — the rate at which commercial property developers borrow loans using rental receipts from lease contracts as collateral — have touched a decade low of 6.5 per cent and below, thanks to excess liquidity with banks that faced difficulty in deploying credit during the Covid-19 pandemic.

Overall, the rates for LRD have fallen up to 200 basis points in the past 18-24 months. For the first time in many years, they have fallen below the capitalisation (cap) rate in the country, said investment bankers and real estate fund managers. The cap rate shows the potential rate of return on real estate investment. The higher the cap rate, the better for investors.

“For most banks, LRD rates are 6.9-7.2 per cent. For good developers LRD rates have fallen to 6.5 per cent and below,” said Vishal Srivastava, president-corporate finance, Anarock Capital.

Srivastava said the avenues for credit deployment have shrunk the most during the pandemic. “LRD is a time-tested model of safe credit and banks took recourse to this secured term loan instrument in the absence of other opportunities,” he said.

Anarock Capital recently helped a Mumbai-based developer raise Rs 385 crore via LRDs. Besides, a benign inte­rest-rate scenario, too, has assisted in the reduction of LRD rates, said experts.

GOING DOWNHILL

• LRD indicates rates at which commercial realty developers borrow from banks against rent receipts
• They have fallen to 6.5% and below for good developers
• Overall, the rates for LRD have fallen up to 200 basis points in 18-24 months
• Capitalisation rates have remained at 7.5-8%
• LRD rates are linked to T-Bills, which are volatile in nature

“LRD loans are always cheaper than most alternative forms of debt available to the real estate sector. Ban­kers prefer such loans since the escrow mechanisms and long-term lease agreements reduce the chances of default,” said Abhishek Shukla, associate director, India Ratings & Res­earch.

Rajesh Agarwal, chief executive officer (CEO) and managing director (MD), Shapoorji Pallonji Investment Advisors, said LRD rates have fallen to 6.7-7 per cent, from 9 per cent, in the past one and a half years, while cap rates have remained at 7.5-8 per cent. “More liquidity and banks chasing risk-averse cash-flow-based fina­ncing have proved that commercial real estate has weathered the work-from-home behaviour well,” said Agarwal.

Sanjay Dutt, MD and CEO of Tata Realty and Infrastructure (TRIL), said while interest rates have reduced overall, rates on LRD loans, in particular, have been very competitive since they provide dual security of property mortgaged, as well as strong and reliable cash-flow stream.

“During the pandemic, we collected nearly 100 per cent. Net 26 million square feet (msf) got leased incrementally, despite less than 3 per cent occupancy in office spaces in 2020. The occupancy since then has gone up. In fact, 2021 leasing is expected to be net 25 msf again, despite the second wave,” he said.

Dutt added that LRD loans for Grade A buildings with stable Fortune 500 companies as their clients are the most preferred. “Also with low leverage, good properties, and a strong lease base, many borrowers have been able to access the bond markets, supported by high credit ratings,” he said.

But Srivastava of Anarock said LRD rates are linked to Treasury Bills, which are volatile in nature, like equity. “The worry is that LRD rates are 6.5 per cent today, but may go up to 7 per cent tomorrow,” he said.

Dutt of TRIL also echoed Srivastava’s views. He said LRD rates may remain low for another year before stabilising.

“There was excess liquidity last year due to the central government’s intervention. A lot of banks were competing with each other to lend to good developers,” he said.