Mumbai | New Delhi:
TRYING TIMES Developers are tapping the unlikeliest of sources, paying exorbitant interest rates, for financing their projects as banks turn their backs, markets remain hostile and high prices make customers hold their buying plans
Rajesh Mehta's cellphone has not stopped ringing in recent days. Bengaluru-based Mehta runs one of India's largest jewellery export companies, but the calls have nothing to do with precious metals or their value which has been as volatile as crude oil in recent months. Rather, Mehta has been inundated with enquiries from cashstrapped builders about financing their incomplete projects as banks turn off the spigot and equity markets remain hostile.
Mehta's main business is trade in gems and jewellery . It may not have taken a backseat, but he is sure spending more time closeted with builders. In the last few years, Indian builders' desperate search for financing has led them to the most unlikeliest of sources including Mehta. Such private money is coming at exorbitant rates of even 36-40% a year, but that has not turned off anybody.
“They (builders) are approaching us for loans, but we are being little more selective this time as we want our interest as well as loans serviced regularly ,“ Mehta says.
Since 2004, Indian real estate companies enjoyed a dream run that lasted till about 2008, until financial crisis, following the collapse of Lehman Brothers. Since then, property market has not seen similar kind of sales, but prices have not come off.
A booming stock market, rising demand and easy access to credit and equity meant that companies could keep launching pro jects and raise money from a variety of sources including the stock market. Consumers kept complaining about soaring prices, but demand was strong especially in expensive pockets of Mumbai and NCR.Funding was not cheap but available and banks were still lending.
All that stopped about a year and a half ago, ironi cally around the time when the stock market boom began after the Ben Bernanke-inspired `taper tantrum' ended in September and Narendra Modi assumed charge of the BJP's election campaign as their prime ministerial candidate.Banks were not healthy and their NPAs (non-performing assets) were rising, but the Reserve Bank of India (RBI) under Raghuram Rajan started becoming stricter forcing banks to provide for NPAs and go after defaulting promoters. “Promoters don't have a divine right to continue,“ Rajan thundered in his first press conference after taking charge putting both banks and promoters on watch.
The real estate cycle was also turning after years of robust or even steady growth. Purchases slackened especially in Mumbai and National Capital Region (NCR) as a sliding economy and sky-high prices put off buyers. Inventory or unsold stock with builders started piling up and as banks reduced funding to manage their NPA levels, many builders started facing a crisislike situation. The stock market boom did not help them forcing builders to go after private sources like Mehta or NBFCs.
“The deficit between cash inflow comprising collections through new launches and sale of non-core assets, and outflow including debt payment, interest servicing and construction expenditures is high. This deficit has only been widening in the last three years,“ said Sudip Sural, senior director, CRISIL Ratings. He should know. Nearly two years ago, developers including Hubtown, Century Real Estate, Housing Development and Infrastructure (HDIL), Orbit Corp and Unitech were either downgraded by credit rating agencies or sent possession notices following reports of their defaults on borrowings. Debt in the real estate sector shows not sign of coming down. The top 15 listed realty developers owed ` . 54,567 crore at the end of March this year compared with ` . 50,400 crore in March 2013.
The stock markets doesn't love real estate companies anymore. Shares of listed real estate companies, especially those with exposure to Mumbai and NCR have underperformed the Sensex and the Nifty. Aggressive attempts by players such as DLF to cut debt by selling assets has not improved their standing with investors.
“A substantial interest rate cut is needed to see any revival in the current property market scene,“ says Lalit Kumar Jain, managing director of the Pune-based Kumar Urban Development. The RBI has cut rates thrice this year and home loan rates have begun coming down a bit. But that is yet to impact the property market.The million dollar question, according to real estate companies, is whether more cuts will substantially revive property market in the coming years.
But some experts believe that this is the wrong question to ask. High prices more than interest rates matter for buyers and builders are not doing themselves any favour by holding prices high especially in Mumbai and NCR. A revival in the real estate market would depend to a large extent on revival in economy but builders also need to face up to certain realities such as their desire to hold prices high despite mounting pressure on the bottomline.
There is a strange dichotomy at play here. There is mounting pressure on builders. They are highly scared of defaulting as that could shut all financing doors for them but they are not responding by cutting property prices.
“Builders fear that any reduction in prices will lead to buyers further delaying their decisions in anticipation of more correction,“ says Ambar Maheshwari, CEO of private equity firm Indiabulls Real Estate Fund. “A lot of refinancing taking place today to stay away from defaults.“
That has led to a pile-up of unsold stock, close to 853.09 million sq ft, or about 650,000 apartments at the end of March 2015, according to property research firm Liases Foras. The worst hit are NCR and the Mumbai Metropolitan Region (MMR).
“If developers reduce property prices, the intermediaries, investors or exiting customers will be at a loss. Also, new and existing unsold inventory will not fetch a good price,“ says Sural. In many ways this is a catch-22 situation. “Their cash flows will not improve until buyers are back in the market and this will not happen unless there is a meaningful reduction in prices,“ he adds.
Developers of course believe that price cuts will hurt them as many have bought land at exorbitant rates. They also believe that consumers will not jump at the first cut in prices and will wait for cuts thereby increasing pressure on the builders. So, they are offering discounts and freebies while borrowing from NBFCs, private financiers and private equity funds.
Recently, around 50 developers like Oberoi Realty, Godrej Properties, Tata Housing, Hiranandani Constructions, Dosti Realty, Rustomjee, Brigade Group, Omaxe, Ansal Housing & Construction, Sobha and RMZ offered up to 15% `savings' in a flash sale through 99acres.com between June 25 and 28.
Some builders are focusing on completing projects which will then unlock cash flows that are locked in.
“We had sold many projects with schemes where a chunk of the payments were due at possession,“ says RK Arora, managing director of Noida-based builder Supertech. For now, to manage the shortfall in projects, the company is raising funds from NBFCs against collaterals. “These are high cost funds which we are using to finish projects. These do lower our margins but the focus is on trying to complete projects,“ he says.
Ajay Chandra, managing director of Gurgaon-based Unitech says the company is not launching new projects and phases and is rather concentrating on construction of existing sold projects and delivering them. “We are using funds from the sale of non-core lands and institutional plots in our residential developments to service debt,“ he says.
Indiabulls Real Estate that has seen its debt rising to ` . 5,973 crore as on March end as against ` . 2,977 crore a year ago is also working on a plan to reduce its debt cost. A spokesperson for Indiabulls Real Estate says that the rise in the company's debt level in the last one year was on account of its London property acquisition.
“We have managed to get this offshore debt at 10% which is lower than our average debt cost of 11.5%. We are planning to lower this interest cost further through a soon to be launched Commercial Mortgage Backed Securities issue that would be at 9.25%-9.5% cost,“ the spokesperson said.
In a recent report, Fitch Ratings, said it expects Indian property developers to deleverage meaningfully by end-2016 as the country's investment climate improves.According to Fitch, the process of reducing leverage had stalled in 2014 due to weak sales and slower cash collections on properties that were sold towards the end of 2014 and in early 2015, as developers introduced easy payment schemes to stoke demand.
(This is part-I of a three-part series on the country's ailing real estate sector)
No comments:
Post a Comment