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Lease Rental Discounting in Commercial Real Estate Lending – What it is and Why it is Growing in India

The market for real estate is massive in India. This industry is believed to generate the second-highest employment, after the agriculture domain. It is also estimated that this industry will acquire more non-resident Indian (NRI) investment, both short-term as well as on a long-term basis. Among the metropolitan cities, Bengaluru is projected to be the most preferred property destination for NRIs, followed by Ahmedabad, Pune, Chennai, Goa, Delhi, and Dehradun.

BKC as CBD

With a growing market, top banks in India are introducing Lease Rental Discounting (LRD) for commercial real estate firms in India. Let’s take a look at what LRD is and why it has become popular in India:

What is Lease Rental Discounting (LRD)?

Lease Rental Discounting (LRD) is a tool that is used to get loans sanctioned from banks by making use of rental receipts as collateral. The bank will inspect the long-term cash flow and offer the loan based on the same amount. The loan is then owed by the rents promised. 

Variables Considered by Bank When Offering Loan

To assess if you’re eligible for Lease Rental Discounting (LRD), the bank will examine numerous elements which comprise of:

• Worth of your property
• Your position to repay
• Other possessions you own
• Liabilities that could happen

How does Lease Rental Discounting (LRD) Run?

Lease Rental Discounting (LRD) loans function on the basis of rental properties being owed a fixed amount of rent. Tenants agree to a lease agreement with the owner of the property. This arrangement commands a regular payment, referred to as rent. The property owner can make use of rental receipts that are made for the lease period as collateral while requesting a loan. 

This procedure is streamlined as rent and is dispatched directly to the bank as EMI instead of reaching the owner. Every bank has its own condition when it comes to the amount of the loan against property. But, on average, you can acquire up to 70% of the property estimate in the loan amount. 

Why is it Growing in India?

The popularity for Lease Rental Discounting (LRD) has been rising in India because the price at which commercial property developers borrow loans making use of rental receipts from lease contracts as collateral – have gone as low as 6.5% below this decade due to the surplus liquidity with banks that faced issues in dispatching credit during the Covid-19 pandemic. 

Overall, the rates for Lease Rental Discounting (LRD) have dropped up to 200 bases points in the last 18-24 months. According to real estate fund managers and investment bankers of India, for the first time in several years, they have gone beneath the capitalization (cap) rate in the nation. 

Benefits of Lease Rental Discounting (LRD)

Expansion of Business

This property owner can go ahead and further invest in property by making use of the loan sanction from Lease Rental Discounting (LRD). 

Tax Benefits 

Tax deductions are available by possessing additional property. 

Balanced Cash Outflow

The borrower can gain from a balanced cash flow as EMIs can be repaid using the rent money payable by tenants. The money received in a loan offers additional revenue via investments. 

Low Capital Expenditure 

The capital acquired from the bank loan significantly aids in decreasing personal expenditure when spending on more businesses or properties. 

For more CRE industry insights and data research do Contact us.

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5 Major Forces that will Drive Commercial Real Estate Industry in India in 2022

In 2021, there has been a tremendous development in residential and commercial real estate in India. The market was already growing as the requirement for residential apartments and plots rose post nationwide lockdown. The property rates observed a huge increase in demand and prices per square foot.

commercial real estate

Apart from commercial areas that tailor to the daily or weekly needs of the residents, the corporate world has started to convey interest in mounting operations, thanks to enhancements in connectivity and anticipated economic development.

We could witness further liquidity transferred into commercial real estate this year. It is believed that the year 2022 will see a growing surge for appropriate workspaces, freehold commercial and residential properties, and new concepts that will increase returns for investors. 

As we go deeper into 2022, here are a couple of forces that will push the commercial real estate industry in India.

Residential Property Market is Expected to Rise

After an extended duration of dropping and then stabilizing, residential property rates are possibly expected to begin rising again. Approximately 5% capital value growth has been estimated for the residential property segment in India in 2022. 

Several of the supply and demand-side factors are taken into consideration and evaluated over the last decade. This drive is projected to continue in 2022 as potential homebuyers’ preferences for larger residences, improved facilities, and lucrative pricing will help seal the deals. 

Foreign Investment is Estimated to Push this Sector

Foreign Direct Investments (FDI) will continue to be a significant development driver, and the same is valid in the case of the real estate players as well. Indian real estate has managed to draw a huge amount of foreign moolah, particularly in the residential market. With RERA assuring transparency and laws permitting 100% FDI in construction, Indian real estate is observing pointed investment infusions from NRIs. 

Property Rates Projected to Rise

In 2020, approximately 1.38 lakh housing units were sold. When you pit it against the previous peak in 2014, this was considered to be a rock bottom of 60%. Nevertheless, between January and September 2021, 1.45 lakh units were sold. There was a 5% surge in sales in 2020. 

Increase in Demand for Co-working Spaces

In 2020, there was significant growth in office closures and a swift shift in ubiquitous remote employment globally. This trend carried on in 2021. However, as the vaccines started rolling out, people slowly returned to their workplaces. Thanks to the pandemic, firms have had to spend time and money investing in digital abilities to let employees work from home. 

Businesses are seeking new working approaches while allowing workplace flexibility to make sure that profitability balances well with employee well-being. The most obvious development has been the surge of a hybrid workforce across an array of workspace choices, including flexible offices. 

Growing Demand for Data Centers

The massive digital push generated by the COVID-19 pandemic has been lucrative for data centers which could still offer an approximate 15% rental yield. Firms started to modify their digital infrastructure to cater to the new work environment instantly after India went into lockdown due to the pandemic, thereby leading to a 25-35% increase in data center capacity. 

The year 2022 is also believed to observe an increase in SCO (shop-cum-office-space) concept development. These SCO plots will assist entrepreneurs to develop their business concepts by owning a commercial space at moderately placed prices with advanced amenities. Sharp investors can witness the benefits of a well-equipped setting that backs retail or office in a favorable market. Mixed-use commercial spaces will help investors in expanding their risk in the investment portfolio by making the most of the new evolving idea. 

For more CRE industry insights and data research do Contact us.