Noose tightens on smaller realtors

MUMBAI/ NEW DELHI/ BANGALORE: Working capital issues are threatening to bring the real estate sector to its knees.

The sector, which only a year back was flush with funds, has run short on much-needed low-cost money to execute projects.

Developers, private equity firms and real estate consultants say that the shortage has escalated the cost of borrowing by over 100-250 basis points in the last 3-4 months.
Such an adverse credit scenario, they say, could stall many realty projects and, in extreme cases, could even force developers to abandon projects altogether.

“The cost of borrowing for builders and developers has definitely shot up in the last few months because lower availability of funds. This is affecting many players. Those who are undercapitalised or have overstretched themselves may not be able to launch their projects or may have to delay them,” says Sun Apollo Fund managing director Chetan Dave.

Stalling and shelving projects, however, may be the last-ditch effort. As a short-term measure, property companies have already started considering freeing up existing assets to meet cost of their ongoing projects.

Mumbai-based developer Orbit Corporation is so squeezed for funds that it is planning to raise Rs 150-200 crore by selling a part of its land bank.

This is despite borrowing Rs 430 crore from the market last year.

Ramashriya Yadav, CFO, sighs in relief saying his company was saved of a bigger impact of the credit crisis because of the money borrowed on better terms last year.
Bangalore’s Sobha Developers has seen its average interest rate move up from 11.50% to 11.60% over the last three months.

The company’s CFO, Pradumna Kanodia, is a little worried.

“The rise in cost of funds would affect our quarterly outlook, but not the annual one. The situation could worsen if the Reserve Bank of India hikes the cash reserve ratio and interest rates.”

Omaxe executive director Vipin Aggarwal said funding deals is becoming very expensive.

Aggarwal said Omaxe is looking for around Rs 2,000 crore of “external funding” for its projects.

Analysts say the liquidity crisis, on its own, is not as worrisome as it is when combined with falling demand.

Developers such as DLF, Unitech and HDIL are dependent on asset sale for their near-term earnings. If sales are not good, they get hit.

But DLF dismisses any such concerns saying its internal accruals are enough to take care of existing projects and acquire new landbanks in the next two years.

“We have completed land acquisition. We now need to spend on construction, which can be funded through internal accruals. Since our profits are growing at 60-70%, we do not need to borrow from outside,” says DLF Group chief financial officer Ramesh Sanka.

In Sanka’s view, it is the smaller real estate players, who are most likely to get hit by the credit crunch.

Another realtor undeterred by the cash crimp is Ansal Properties & Infrastructure, which has a project pipeline worth Rs 70,000 crore in north India alone.

Ansal has initiated talks with several financial institutions to raise resources for its forthcoming projects.

Like Ansal, the major realtors are confident of meeting their future investment requirements, but analysts have started expressing concern over the interest rate at which funds are being borrowed.

With cheap sources of funds such as banks and stock market now history, realtors are borrowing by issuing non-commercial debentures to debt mutual funds.

Some have even turned to private financiers, who charge exorbitant interest rates ranging between 18% and 25%.

“Yes, there are builders borrowing from private financiers. This is a very expensive source of borrowing,” revealed an executive from a leading real estate firm.

Private equity firms, however, continue to have confidence in their real estate clients as they see the current market condition as temporary phase and expect it to turn around in 12-24 months.

Pankaj Renjhen, managing director at real estate consultant Jones Lang La Salle Meghraj says internationally, spending in the private equity sector has gone down.

“But India is still a lucrative market as are Israel and China, which will get funds. This phase is temporary and might stay for next 12-14 months.”

Orbit’s Yadav echoes Renjhen’s sentiment, “The market will see a V-shaped recovery within 8-12 months.”

Ajoy Veer Kapoor, founder and MD, Saffron Asset Advisors, believes that the credit crisis will lead to a shakeout, which will boot out incompetent players.

“The credit crunch a sign of the market maturing. In the last 3-4 years, real estate has grown rapidly. Now, the government, the Reserve Bank of India and global banks are bringing in prudent policies which will let only the good (property) developers exist,” say Kapoor.