Debt need in residential sector to touch Rs 4.30 L cr till 2026: Report

In India's thriving real estate sector, lenders have a golden opportunity to capitalise on the momentum. Recent transformations, like RERA, GST, and REITs, have opened doors for increased lender participation. Last year, Public and Private sector banks accounted for 68 per cent of total debt sanctioned, highlighting growing confidence and interest – Lata Pillai, Sr MD, Capital Markets, India, JLL

Hyderabad: The total debt market has a potential of Rs 14,00,000 crore ($170 billion) financing opportunity in Indian Real Estate between 2024-2026, according to a JLL-Propstack report titled “Decoding Debt Financing: Opportunities in Indian Real Estate.” This presents a substantial growth opportunity for lenders to cater to the needs of landlords/developers soon. This opportunity comes from two primary market segments, the construction finance or long-term debt, and Lease Rental Discounting, both slated for unprecedented growth over 2024-2026 period.

It is estimated that the long-term debt requirement in the residential market will amount to nearly Rs 4,30,000 crore till 2026. Furthermore, India's real estate construction market, comprising other asset classes like Grade A commercial offices, high-quality malls, warehousing parks, and data centres, is collectively predicted to experience a 35-40 per cent growth trajectory over the same period. This equates to an overall estimated potential of Rs 5,50,000 – 6,00,000 crore.

Construction finance in India is dominated by the residential sector, accounting for approximately 70 per cent of the market. However, there is still a significant gap between the total residential construction debt requirement and the debt that has been sanctioned, indicating the underserved potential of the market. Given strong fundamentals and a significant need for long-term debt in construction finance, the current gap between sanctioned and market debt stands at nearly Rs 1.5 lakh crore.

Additionally, the Lease Rental Discounting (LRD) market in the commercial segment is expected to exceed a value of Rs 8,00,000 crore by 2026. With strong demand fundamentals and sustainability measures in place, the LRD potential in the commercial office segment alone is expected to grow by 30 per cent in the next three years. Furthermore, the physical retail market and other rent-yielding assets such as warehousing, data centres, and hotels present substantial opportunities for lenders in the Lease Rent Discounting (LRD) segment.

"In India's thriving real estate sector, lenders have a golden opportunity to capitalise on the momentum. Recent transformations, like RERA, GST, and REITs, have opened doors for increased lender participation. Last year, Public and Private sector banks accounted for 68 per cent of total debt sanctioned, highlighting growing confidence and interest, said Lata Pillai, Senior Managing Director, Capital Markets, India, JLL.

“The popularity of LRD in commercial real estate has also grown, constituting an average of 19 per cent of total debt sanctions, with a notable increase to 25 per cent in 2023. While dominant lenders in the market pose challenges for smaller developers in accessing credit, it also presents an opportunity for new lenders to enter the market and cater to the financing needs of aspiring developers. To support developers at different stages, innovative and customized funding structures are needed, offering a lot of opportunity for AIF. Private credit will continue to play a crucial role, particularly in the residential sector. Shifting focus to smaller developers who make up over 2/3rds of the residential market can make funding more inclusive," she added.

The report underscores India's real estate sector as a pivotal contributor to the country's GDP growth, predicting significant potential for lenders in this burgeoning market.

Banks make a strong comeback in India's RE debt market

Upon analysing the sanctioned debt numbers across the top seven cities Mumbai, NCR, and Bangalore accounted for 80 per cent of the total debt sanctioned in the last six years, demonstrating their importance in the real estate market. However, challenges such as the IL&FS and NBFC crisis in 2018 and the impact of the pandemic in 2020 caused a slowdown in the debt market. But the resurgence of the real estate markets from 2021 onwards has created new opportunities for lenders and borrowers alike.

The study showed that the banking sector's participation has increased, accounting for 70 per cent of the total debt sanctioned in 2023, compared to non-banking sectors.