Builder mortgages 50,000 sq ft for Rs 30 lakh

Oct 18, 2011, 07:31 IST | Varun Singh

Cash-strapped builders from the western suburbs are borrowing money from private lenders at an astronomical interest rate of up to 40 per cent

As the realty prices hit an all-time high in the city, prospective buyers have been shying away from investing in real estate causing a liquidity crunch in the realty sector. This has caused a lull in the sales and triggered a cascading effect on the capital and profits of builders and developers.

Cash crunch: Investments in the real estate have caused a lull in the
sales and triggered a cascading effect on the capital and profits of
builders and developers. Representation pic

In fact, nearly a dozen builders, especially from the western suburbs are in a deep financial mess. The list comprises mostly of mid-size builders, with a minimum of three to four prominent names, which are directly or indirectly associated with the realty sector.

High interest rates
According to sources in the market, the biggest hurdle for the builders today is the liquidity crunch. With almost negligible sales taking place in the city, their main source of income has dried up. Moreover, private lenders have hiked their interest rates from 18-24 per cent to 24-36 per cent per annum, added a builder.

"A builder has already mortgaged his 50,000 sq ft property for a meagre amount of Rs 30 lakh. He wants to repay the loan taken from a private lender at high interest rates," said a builder from western suburbs.

There are umpteen cases wherein builders have taken money from private lenders earlier and with the delay in repayment, the interest is piling up. To get rid of this interest, builders are borrowing more money from other
private lenders.

Besides, seeing this rush amongst the builders, the opportunist private lenders have deliberately hiked the interest rate, so that they can make maximum profit.

A private lender, requesting anonymity, disclosed that just a week ago, he gave about Rs 40 lakh to a builder at an interest of 40 per cent. He claimed that builders are desperate and are ready to pay any amount of interest that is being asked. "Builders are facing major problem in terms of liquidity and have several commitments to fulfil. Failure to live up to their commitments will tarnish their image. Hence, to avoid such a situation, builders have started borrowing money at whatever interest rate they can," said a lender.

Money drying up 
"There are many examples wherein private equity players have backed off. Citing the current market scenario, investors do not want to take the risk and have chosen to stay away from the business for now," said a builder.

'Good time to buy'
Commenting on its findings, Ramesh Nair, managing director of Jones Lang LaSalle (West zone), a real estate research firm, said, "As sales continue to look sluggish in many parts of the country, developers are becoming more flexible on their stated terms. Many sale prices today are negotiable. While developers are ready to bargain, they are against reducing the official quoted price below a certain point. This is partially because they don't want to advertise the fact that certain customers paid less than others. Builders are most likely to offer freebies or incentives."

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