How is lease rental discounting going to impact India's real estate sector
Updated: Apr 12, 2020
To give a brief understanding of LRD --> Lease Rental Discounting (LRD) is a term loan availed against the future rentals from a leased commercial (office space) or retail (mall/shops) property. The loan is provided based on the discounted value of expected rentals and the underlying property value.
Companies generally convert the construction loan availed at the time of project implementation to LRD loans post the completion of construction, tying up of tenants and commencement of rentals. This often helps in reduction of interest cost as Financial Institutions like Banks / NBFC view LRD loans as a safer exposure compared to project loans due to the predictability of rental cash flows and mitigation of execution and marketing risks to a large extent. It is one of the most secured products since cash flows are based on contractual agreement rather than the occupiers sign.
In current kind of pandemic situation of lockdown due to Corona disease (Covid-19) is expected to have massive impact on the leasing of commercial properties. In the first quarter of the current calendar year (2020), the absorption of office properties came down by 30%. Bengaluru, Mumbai and Delhi NCR recorded nearly 75% of net absorption in Q1’2020, despite decline in overall market. There will be lot of cost pressure coming in for chief executives and will be forced not to invest in capital expenditure. Work from Home (WFH) can take away close 5 to 10% of office demand. In long run, expect accelerated adoption of WFH though there are challenges like bandwidth, regulatory obligations etc. There will still be demand of co-working space due to flexibility and helps in business continuity planning. But they will have to work a lot on their designs to follow de-densification strategy and re-arrange interiors and common areas due to current social distancing.
After Covid 19, if there are negotiations that will reduce these cash flows or change the nature of payments. Firstly the loan value will get affected & secondly month on month repayment factored by the bank may also get affected due to re-negotiations of rent/ terms. The developer may need to infuse equity to make these obligated payments to avoid any defaults leading to a non-performing asset.