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95% Real Estate Developers Caught In A Debt Spiral

Thursday, November 19, 2015
By A Business Reporter

Stagnating collections in the wake of declining sales velocity had resulted in debt taken for residential projects by these developers surging by 25% to Rs 61,500 crore in fiscal 2015.

An analysis of India’s top 25 realtors, comprising ~95% of the market capitalisation of the sector, by Crisil shows that as much as Rs 30,000 crore of debt obligations will face high refinancing risk with demand in their respective markets expected to be tepid over the medium term.

The past two years have seen realtors refinancing principal and interest obligations, some by leveraging the cushion available in their operational commercial portfolio. Add to that the problem of construction cost outpacing customer advances lately, and developers seem to be caught in a debt spiral.

Recent regulatory measures such as relaxation in foreign direct investment (FDI), and recourse to funding through non-convertible debentures (NCDs) and private equity, are expected to provide some respite in the short term for the sector. The flipside, however, is the high returns expected by private equity investors compared with the relatively low cost of bank loans.

Assuming this to be 20% per annum, the cumulative payout by the sector over a 5-year horizon can be as high as Rs 85,000 crore. This can amplify refinancing risks by an order of magnitude unless demand picks up substantially.

Says Sushmita Majumdar, Director, CRISIL Ratings: “These 25 developers account for half of bank lending to the real estate sector. And most of those facing high refinancing risk are in the National Capital Region (NCR). With net exposure of banks expected to decline by ~5% for the first time in the current fiscal – banks used to meet ~90% of the requirements of these realtors till last year - an increasing proportion of the funding gap is being bridged by costlier NCDs and private equity monies.”

Stagnating collections in the wake of declining sales velocity had resulted in debt taken for residential projects by these developers surging by 25% to Rs 61,500 crore in fiscal 2015. Saleability of projects has also been declining, especially in north India.

Another area of concern is inventory, which surged to 58 and 48 months, respectively, in the north and west at the end of fiscal 2015. South India had a more comfortable 22 months of inventory.

The silver lining is that demand for residential projects, which was wallowing in negative territory in the last couple of years, is expected to turn around mildly -- barring NCR that is – driven by government initiatives and macro-economic improvement.

Says Binaifer Jehani, Director, CRISIL Research: “Cities such as Mumbai will benefit from infrastructure projects already announced, which will improve connectivity and boost absorption.

On the other hand, NCR, which is typically investor-driven, will see limited demand growth. With regards to average capital values in the six cities, these are expected to rise slightly in the near term. Large planned supplies and considerable inventory overhang would preclude significant appreciation in prices. Commercial lease rentals, too, will remain stable because of large planned supplies.”

The government, with a view to providing much-needed fillip to the sector, has relaxed FDI norms. Other regulatory proposals such as the Real Estate Bill, along with initiatives on affordable housing and implementation of the real estate investment trust (REIT), can potentially address demand as well as funding issues.

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