Real estate investment: The safest option for banks

Over the years, real estate has ranked itself in the list of ideal investment destinations for banks. As projects in various sectors have dropped the ball, banks have given a nod to funding commercial real estate developments, irrespective of the fact that demand is moving at a slow pace and inventory is piling up incessantly.

India, for instance, has witnessed more than 50 real estate projects out of 173 that felt the need for bank funding in the first half of 2013-14. Furthermore, in comparison to funds lent to other sectors, banks have been more lenient towards the realty sector.

According to analysts

Coming as it does in a downtrend economy, analysts have made a cautionary statement on the crisis persisting among realty developers. Developers need to take a note as real estate exposure of banks shoots up that may arise due to the crunch in market demand. In this case, the market risk is expected to be more. Although there have been numerous downgrade ratings in the sector, most of the projects are covered via lease rentals that minimizes the risk.

With a note of concern, real estate consultants and bankers confirm that RBI has taken measures to safeguard the funds lent to developers against rentals. In addition to it, the real estate sector offers the banks the lucrative option to earn higher returns in comparison to pharma or telecom.

World scenario

World real estate scenario has another story to tell. Market experts suggest that the value of housing will be endured and increased by urban planning and good design. It will also ensure adequate storehouse of value for homeowners and lenders and prevent the setting up of slums.

Investment vehicles to manage and fund projects are generally not handy in developing markets. This seems to be the major problem for different real estate markets of the world. The reason for this is lack of government investment in urban planning in growing markets, lack of long-term capital and unwillingness to utilize tax policy to encourage investment.

The solution to this is simple-REIT (real estate investment trusts). REITs can stand as a helping hand for promoters to complete their undertaken projects. In addition to this, few other options that can be an aid to the realty sector include:

• On-going management and development
• Attracting long-term capital
• Offering specialization property-wise
• Alluring investors who wish to have current income