Reality seems to be catching up with the realty sector. With the recent defaults by real estate developers such as Orbit Corporation, Hirco Plc and Housing Development and Infrastructure Ltd (HDIL) and a downgrading of Hubtown for defaulting on repayment of interest and principal on Rs 100 crore of non-convertible debentures (NCDs) by rating agency Brickwork has definitely spread panic in the market. Lower sales and high indebtedness coupled with regulatory problems seems to be the reason behind defaults in the sector. Moreover, in a business environment marked with default risks, banks are trying to minimise hit to balance sheets. Clearly a financial crisis is staring the developer community in the face. Mayura Shanbaug reports...
The balance sheets of a majority of developers are currently stretched, says Shobhit Agarwal, Managing Director, Capital Markets, Jones Lang LaSalle India, “if the situation prevails for longer than expected, it could prove to be a challenging situation to deal with.”
“These are the times to maintain existence and not to be adventurous. The primary focus of developers should now be to reduce finance cost. To achieve that, developers should focus on reducing their exposure to assets that are not intended to get developed in next three years or so,” says Agarwal.
He feels that the developers should focus on faster execution of existing projects which can help them improve cash flows by new sales, and on recovery from earlier sales where payment is construction-linked. “Institutional and individual investors generally await such situations and help developers by acquiring assets at significant discounts,” he adds.
A similar concern is expressed by Mukesh Chattani, Sector Specialist Real Estate, CARE Ratings, who believes that developers should choose to divest non-core assets or even core assets (to some extent) to manage the liquidity or enhance financial flexibility by repaying debt.
“The other alternative for developers with good financial flexibility would be to replace the existing debt with longer duration debt or private equity money or a combination of both and wait till the economic scenario improves,” he suggests.
Incidentally, property registration in Mumbai saw flat growth in June after 15-20% growth in April and May.
Sunil Mantri, Vice President NAREDCO & CMD Mantri Realty agrees that the sector is going through tough times. Ditto with the country’s economy, but he feels that there is no need to panic at this moment. However, Mantri expects real estate prices would remain stable during the current year and they may not appreciate in a very big way.
“Reducing property prices in a drastic way would be difficult since the input costs, such as steel, cement, labour and various construction materials has gone up substantially,” says Mantri. “Besides the government has started charging heavily for fungible FSI premium and other premiums at the current ready reckoner rates,” he says.
The cost of construction in recent times has gone up considerably. In cities like Mumbai, with the cost of fungible FSI, the cost of construction has increased by as much as 20%. According to many the main cause of a few developers facing institutional defaults is the regulatory issue where permissions are delayed for years together.
“Generally developers expect that permissions will be granted within 6-12 months and based on that he plans banking repayments and takes project loans for development. However, in some of the cases it is observed that environment clearances are received after 3 years which has impacted re-payment schedule of the developer,” explains Mantri.
Incidentally, this issue was raised by the developers with the Secretary, Banking and Finance to give auto extensions in case of delay on the part of government in issuing regulatory approval which was in-principle agreed by all banks.
“However, in practice, banks are reluctant to allow Corporate Debt Re-structuring (CDR) or rescheduling accounts, wherein the complete fault lies with the government in issue of the NOC. This is impacting a few developers,” points out Mantri.
“I feel since the government has re-scheduled the account of more than Rs.5 lakh crore of Indian Corporates – in power, telecommunication, aviation, infrastructure, energy and construction companies, then they must include the real estate companies too,” he says.
“Banks should come forward to help the borrower (including developer) to consider the delay which has happened on the part of the government and that particular project account should be given breathing time so that unnecessary pressure on the developer as well as the bank / institution can be avoided,” he suggests.
Mantri hopes that the developers will not take a rigid stand in holding stock, like a manufacturer who does not sit on stock / inventory. “A similar attitude is required to be followed by the developer, if any deal is losing out for little negotiation, the developer must close the deal because cost of funds are high and getting liquidity into the system should be the first and foremost priority for each and every developer rather than sitting on land banks, finished / unfinished stocks,” he advices.
According to sector experts “by liquidating a little stock at a discounted price, the developer may not loose, but on the contrary will get his own liquidity rather than running after private equity players, private equity lenders or financial institutions who are very expensive or waiting for long time for the banks / financial institutions to get the loan.”
Can we see some correction in the prices? “Theoretically, this is a matter of simple math. Launches at lower price points can attract demand and funding situations can get solved. However; this is easier said than done,” says Shobhit Agarwal.
“Prices at which deals do take place have already witnessed a correction. Under-construction properties are available at considerable discounts to ready property buyers. The discounts vary, depending on how much pain a particular developer is in,” he says.
Chattani feels that real estate price is a function of habitability of the area. “In old established areas and saturated markets the prices are expected to remain sticky whereas in the upcoming areas the prices will be determined by the demand-supply gap,” he says.
However, as per Residex, NHB, out of total 20 cities, 14 cities have witnessed price increase in Jan-Mar. 2013 quarter over Jan-Mar. 2012. In Mumbai as well though the prices have remained stagnant overall, there was around 10% appreciation in prices in certain micro-markets like Navi Mumbai and Thane.
With festive season approaching, will the situation change for the better? “December year end is a good bonanza period for the NRI community,” says Mantri. “The $ has peaked, it is time to knock at the doors of our NRI friends who are sitting on a huge surplus and waiting for a good opportunity to make investments in India,” he says.
“If a little attractive pricing is done, volumes will happen and I hope that during Diwali time and thereafter a little improvement in liquidity likely to happen,” he adds.
But if that doesn’t happen than a major financial crisis could plague the sector, feel analysts.
These are the times to maintain existence and not to be adventurous. The primary focus of developers should now be to reduce finance cost. To achieve that, developers should focus on reducing their exposure to assets that are not intended to get developed in next three years or so.
Managing Director, Capital Markets, Jones Lang LaSalle India
The other alternative for developers with good financial flexibility would be to replace the existing debt with longer duration debt or private equity money or a combination of both and wait till the economic scenario improves
Sector Specialist Real Estate,
I feel since the government has re-scheduled the account of more than Rs.5 lakh crore of Indian Corporates – in power, telecommunication, aviation, infrastructure, energy and construction companies, then they must include the real estate companies too.
Vice President NAREDCO & CMD