Bank credit to commercial real estate grows threefold in 11 months of FY24

According to the latest RBI data, outstanding loans to CRE stood at Rs 3.9 trillion as of February 23, 2024. It has grown almost by Rs 1 trillion in the past two years from Rs 2.94 trn in Feb 2022

Bank credit to commercial real estate (CRE) grew by almost three-fold to Rs 67,485 crore during the 11-months of the current financial year (April 2023 - February 2024), from Rs 23,432 crore in the same period of the last fiscal.

This surge in loans for CRE is driven by growth in lease rental discounting, especially for office space.

According to the latest Reserve Bank of India data, outstanding loans to CRE stood at Rs 3.9 trillion as of February 23, 2024. It has grown almost by Rs 1 trillion in the past two years from Rs 2.94 trillion in February 2022.

Anuj Puri, chairman of property consultant firm ANAROCK said the office leasing market in India has been doing exceptionally well. “It is propelled largely by two sets of occupants. One is Indian corporates and start-up ecosystem which continues to do very well. Second is the global capability centres (GCCs) of multinationals. They are setting up large campuses.”

The state of the economy report released earlier this month said that the resurgence of GCCs has also helped demand for grade A offices to expand strongly. Higher traction in overall leasing has aided the performance of listed companies in this segment.

“Office leasing is going strong. The developers are building them and taking lease documents to the lenders. They are, in turn, funding developers. That is why there is a surge in credit to CRE,” Puri said.

The cash flows, that is monthly rentals, are coming from tenants and not from developers. Banks enter into escrow arrangements which are three party agreements – bank, tenant and the developers. The money from the tenant would go to the bank first and the balance then goes to the developer, Puri said, indicating the comfort for banks for lending in this sector.

Typically, the interest rates on such loans range between 8-9.5 per cent, depending on the profile of the developer. Most of the developers carry credit ratings which are above ‘A’.

The calendar year 2024 is expected to be the best-ever year as demand coming up for leasing is expected to surpass the levels seen in 2019.

According to a senior public sector bank executive, banks derive comfort in lease rental discounting advances because it is a safe debt. The premises are ready with occupation certificates and tenants in place.