Lenders Seek Higher Cover from Property Developers

Cover means the lender has a certain value of assets compared to a loan given. However, lending rates for developers are coming down in recent quarters. A rising number of lenders are seeking higher security and receivables cover from companies seeking financial support even as liquidity for real estate developers continues to be tight despite several funds stepping forward to provide financing options for stalled projects. Given the various risks associated with execution and demand in the backdrop of the ongoing Covid-19 pandemic, the lenders want their exposure well insured. The security cover for these loans has gone up to 1.66 times based on the funds sanctioned so far this year as against 1.62 times a year ago. The rise in these covers indicates that the recovery is likely to take longer than expected by all stakeholders. Interestingly, the smaller loans--up to Rs 50 crore--have higher security covers at 1.79 times. In contrast, if the loan is for over Rs 500 crore, the security cover eases to 1.48 times, showed data from real estate data analytics firm, Propstack. Also, loans with shorter tenure of up to 12 months are attracting higher security cover of 2.1 times against 1.55 times for a 5-year term loan. The number additionally goes up to 1.86 times for loans with interest rate of over 15% and dips to 1.44 times if the interest rate is less than 10%. Other than security cover, two factors are being discussed more critically. First being the receivables cover and this is nothing but free cash-flows available to service debt. In broader terms, it is measured by debt service coverage ratio (DSCR), and a minimum of 1.5 times can create a shield in falling prices scenario. The segment, except for affordable housing, has already been under pressure generating negative cash flows from operations that have led to higher leverage and refinancing risks. The widening cash-flow gaps and its impact on debt, interest servicing may prove to be an existential crisis for smaller developers who may not have new project funding lines, balance sheet liquidity or support from diversified operations.