3rd of the series
Track2Realty Exclusive
One of the biggest problems afflicting the sector is its high level of debt. The debt load of 11 listed real estate companies stands at Rs.38,500 crore. The Rs.25,000 crore debt, which the RBI allowed to be restructured during the slowdown, is due for repayment. Moreover, with the US and European debt crisis affecting sentiments across the world, the developers will be under pressure to reduce their debt-to-equity ratios. Fund raising through the QIP route will reduce, and entering the capital market also does not seem to be viable, at least in the first couple of quarters in the calendar year 2012.
In order to generate funds, the JLL said many developers will sell their non-core land and divest their stakes in non-core business such as hospitality and retail. Knight Frank warns that promoters who had pledged their shares in lieu of funds have already breached the comfort levels of investors and this may result in losing control over the company to lenders. In order to overcome these challenges, developers have resorted to the last option available to them— Selling-off of assets like land, Transfer of Development Rights (TDR), leased properties and SEZ land. Many developers have either diluted their stake or completely sold off some of their assets in order to raise funds and reduce their debt to improve their margins.
The cost of funds of real estate companies are too high now—14-16 percent—depending on the credibility of the borrower. Because of RBI regulations, following a series of scams, banks have been wary of lending to real estate companies for some time now. With a ‘pariah’ status being thrust upon, the developers are increasingly being forced to turn to alternative methods of financing such as non-banking finance companies (NBFCs), which charge higher rates of interest than banks–as high as 36-38 per cent.
The tough times, however, are not expected to last and the inherent resilience of the growing Indian economy will help overcome the global slowdown, but it will not witness the kind of price appreciation it has seen in the past. Experts say the economic uncertainty may impact the Indian real estate market in the initial few months of 2012 but it would not be severe.
Om Chaudhry believes private equity firms are bound to stay in India. Urban housing in India is a trillion dollar opportunity to 2026. It, in fact, has the strength to push the GDP growth by another 2 percentage points and seek the much wanted 10 per cent rate of growth. Players who can capitalise on this opportunity with continuous adherence to quality and customer focus shall command definitive success.
Anuj Puri, Chairman & Country Head JLLI says mid-income residential real estate seems a good investment option. For long-term investors, the residential real estate sector is a lucrative proposition. But, Puri says investors should avoid ploughing money into projects in the early stages of completion, because these may suffer delays. The safest options are ready projects.
According to Puri the impact of the global slowdown could be felt in the IT sector, which might impact demand for IT-specific office space. But demand for other office space segments would continue to look good in the long term.
However, everybody agrees that boom time is certainly a long way off for property developers. As things go, it certainly looks like the realtors are going to have a tough time ahead before things improve. Stakeholders in this sector need to strike a balance in catering to the ever-rising demand. Those who will succeed in the sector are the ones who balance caution with diligence, evaluating all potential opportunities with practicality and are ready to be realistic in their cost-benefit analysis.
