While the piling debt of the listed real estate companies has hit the headlines throughout the year 2011, the debt of the unlisted realty companies today stands at Rs.15 trillion. This is something that is dashing the hopes of any revival in the year 2012.
Contrary to the general perception that banks had curbed lending to the real estate sector, a study shows that they actually lent more—a significant chunk of it being risky loans to firms that are not listed on the stock exchanges.
Between October 2010 and September 2011, according to a December report by IDFC Securities Ltd, lending by banks and non-banking financial companies (NBFCs) to real estate developers grew 14% to Rs.1.6 trillion.
Unlisted developers account for 62% of this sum, says the report titled Unlisted Developers: The bigger black hole. Banks lent Rs.15 trillion.
Experts warn that such a fast pace of lending will only lead to an increase in loan defaults, especially with realty firms struggling to sell properties.
“With the next six-nine months expected to remain difficult (for the realty sector) and a significant portion of debt due for repayment, defaults by some unlisted players are unavoidable,” analysts Nitin Agarwal and Vineet Chandak of IDFC Securities wrote in the report.
Banks and NBFCs stepped up lending to the realty sector despite repeated statements of caution by the Reserve Bank of India (RBI) on the high risk of lending to the price- and interest rate-sensitive sector.
Given that operational cash flows of many developers are strained due to low sales, they could be forced to cut prices, the IDFC report says, predicting a much-anticipated 10-25% correction in property prices in the near to medium term.
Of the incremental lending of about Rs.20,000 crore between October 2010 and September 2011, 67% went to unlisted firms, according to the IDFC report.
