Borrowing costs ease for developers

The new year has brought some relief for real estate companies, many of which were believed to be on the brink of bankruptcy due to tight liquidity situation, mounting debts and little chances of loan refinancing. The interest rates at which developers were borrowing last year have cooled by 250 basis points (bps), or 2.5%.

DLF Ltd and Unitech Ltd, the two largest developers in the country, are borrowing at interest rates lower than the October peaks as various measures taken by the government have started showing results. From 16% in October, the interest rates for developers have fallen to 13-14%.

Ramesh Sanka, the chief financial officer of DLF, told DNA that the company is now borrowing at costs lower than in October. “Interest rates have started cooling off. Borrowing rates are down by 250 bps. So the liquidity situation will start improving,” Sanka said.

Bhaskar Chakraborty and Param Desai, analysts with institutional research firm IIFL, in a January 7 report said, “DLF’s borrowing costs have fallen 250 bps after peaking in October 2008, indicating that credit flows have improved. Though we expect operating performance to remain weak till first half of fiscal 2009-10, macro conditions are turning for the better, with lower borrowing costs and mortgage rates.”

Sources close to Unitech’s financial team confirmed similar developments at the debt-ridden realtor. Unitech has debts of over Rs 9,900 crore on its balance sheet and might use the favourable lending scenario to rework its existing loans. When contacted, a Unitech spokesperson declined comment on the matter.

But the company is clearly in a better position now than it was in the October-December quarter. In a December 2, 2008 report, Amit Agarwal and Gagan Agarwal, research analysts with Merrill Lynch, had downgraded the Unitech stock “due to increasing worries of bankruptcy arising from a stretched balance sheet amid slowing sales due to worsening economy and weakness in the IT/ITeS sector”.

“The risks have increased due to uncertainties regarding its telecom investments and the capex requirements in the medium term,” they said.

Clearing or reworking debts seems to be priority for other developers too. Omaxe Ltd in November last year raised Rs 100 crore from Life Insurance Corporation (LIC) to repay part of the Rs 300-crore loan it took from Indiabulls Financial Services.

The developer has repaid a total of Rs 120 crore to Indiabulls Fin, said sources close to the development. It now has another six months to raise the remaining Rs 180 crore.
On its part, Bangalore-based Sobha Developers is selling off land banks and exiting joint ventures to raise cash. Analysts said that the company has borrowed mainly from public sector banks and so has managed to refinance its loans at lower interest rates.
Another Bangalore-based developer Puravankara Projects Ltd also refinanced its construction debt through financial institutions.

Ravi Ramu, director, Puravankara, said, “Our interest rates remained at 13.5-14% levels and we did not borrow at higher levels. Also, we have been able to raise construction funding for the parent company.” Sources said the developer raised Rs 430 crore from new foreign and domestic players as its debt of about Rs 500 crore is maturing mid-2009.

Recently, the RBI cut the cash reserve ratio by 50 bps and repo and reverse repo rates by 100 bps, allowing banks to cut interest rates. Rajeev Talwar, group executive director, DLF, said, “Decrease in rates by the RBI would mean lower borrowing costs. I expect some more incentives to be announced before elections. Big corporates in India are now able to borrow at lower rates due to their repaying capacity. I can’t comment on smaller developers.”