Continuous rise in interest rates by the banks is dampening the effort of the real estate companies to reduce debt by selling non-core assets. The combined net debt of the country’s top eleven listed real estate companies is Rs.38,500 crore. The cost of debt for most real estate companies is in the range of 12-15%, on the basis of which the combined interest burden on them is between Rs.4,600 crore and Rs.5,800 crore.
Reserve Bank of India last week raised interest rates by 25 basis points, which was the twelfth in eighteen months. Realtors term it as double whammy since homebuyers are being forced to postpone their purchases while cost of debt is rising for them as well.
DLF’s debt stands at Rs.21,524 crore, Unitech’s at Rs.5,330 crore while HDIL’s debt stands at Rs.3,920 crore. The first quarter of this fiscal was a bad one for the real estate sector where the year-on-year revenue growth of 8.7% was overshadowed by 19.5% year-on-year reduction in profit, clearly reflecting dual pressures of rising input and interest costs, says a recent Edelweiss report on the sector.
While some real estate firms are trying to reduce their debt, the impact has been nullified by the rise in interest rates. “We are reducing our debt but the interest outgo hasn’t come down because of growing borrowing rates,” says Ajay Chandra, managing director, Unitech. In the last one year, the company has reduced its debt by 15-17% through internal accruals.
DLF’s net debt has not changed too much in the last one year, which has meant that its interest outflow has gone up by almost 2%. The company’s current debt cost has gone up from about 10.5% in March last year to about 12.5% now. For every 1% increase in interest rate, the annualised interest outgo increases by about 200 crore. “Rising interest rates have had an impact on the profitability of the company as well,” says Ashok Tyagi, Group Chief Financial Officer at DLF. This is true for most other real estate companies as well.
DLF’s profit after tax has declined by 12.8% year-on-year at the end of the first quarter of this fiscal. In the same period, HDIL has seen a drop of 10.8% Y-o-Y in its profit after tax.
In the case of Ansal API, the average cost of debt has reached 14.5%. “We had repaid our higher cost debt when we raised money through QIP. Today, about 10-15% of our current interest outflow can be attributed to interest rate hike in the last one year,” says Dinesh Gupta, Assistant Vice-President, Investor Relations at Ansal API, which has reduced its debt by 300 crore in the last one year.
Industry watchers though feel there is trouble brewing. There obviously is a reason to worry. Huge amount of cash crunch could be expected as most developers are under severe pressure. There will be a lot more developers coming out and selling non-core assets.
The other way out could be high cost debt and most importantly, reduction in prices,” says Ambar Maheshwari, MD, Corporate Finance at property advisory firm Jones Lang LaSalle.
A number of realty companies are trying to reduce their debt by selling non-core assets. DLF plans to raise Rs.6,000-7,000 crore via this route. Unitech too is looking at reducing its debt further by selling its SEZs and IT parks. Sobha Developers plans to bring down its debt by Rs.300 crore by March 2012 via internal accruals and asset sales.
