Overseas funds ban hits real estate firms

Unitech, the country's most valuable real estate company and construction major Parsvnath Developers will have to pay more for loans because of a ban on overseas borrowing, forcing them to incur the highest interest costs in five years.

The finance ministry's May 18 ruling will push up Unitech's funding charges by at least 5 percentage points, managing director Sanjay Chandra said.

Parsvnath was quoted an interest of 14 per cent on a loan from a public sector bank, chief financial officer Ravi S. Pani said.

By curbing the overseas loans to developers, India wants to cool land prices that have as much as tripled in three years and driven the rupee to a nine-year high. The higher costs may deter builders from constructing 10 million housing units a year, which India would need by 2030, according to the Asian Development Bank.

"I don't understand why the government has throttled this avenue and singled out the real estate industry,'' said N K Ahuja, chief financial officer at Eldeco Group, a New Delhi-based developer with projects worth $860 million. "We were looking at raising funds through this route. But now we'll end up paying fancy interest rates to the domestic lenders,'' Ahuja added.

The domestic builders need loans to buy land, steel and cement as Asia's fastest wage growth makes homes more affordable. The Reserve Bank of India has asked banks to curb loans to the real estate sector, making it harder for the developers to obtain cheap financing.

"More than interest rates, the concern for developers is the availability of funds,'' Unitech's Chandra said. Unitech was about to complete an overseas loan when the finance ministry changed the rules, he added.

"The Indian banks are not in a position to meet the funding requirements for large projects undertaken by the bigger developers for various reasons, such as single borrower limits and high risk-weights for real estate lending,'' Chandra said.

The Indian lenders, including ICICI Bank and Housing Development Finance Corporation, raised the rates on home loans, deterring buyers from purchasing smaller properties, DLF vice chairman Rajiv Singh said last month. The DLF IPO offer, touted as India's largest initial public offering, opened yesterday.

While the government estimates that $320 billion will have to be invested in building roads, ports and bridges by 2012, it is curtailing debt flows into the sector to stem gains in the rupee and guard against a property bubble.

---

On a shaky ground

Unitech, the country's most valuable real estate company, will see its funding charges go up at least 5 percentage points

The finance ministry's May 18 ruling to stave off a property bubble has also turned the plans of Parsvnath Developers topsy-turvy

More than interest rates, the concern for developers is the availability of funds