Home buyers who have booked properties this calendar hoping they would get their homes in the next two years may be left disappointed, say analysts.
That’s because real estate developers have used up the money paid upfront by home buyers to repay debt rather than to build houses, a senior research analyst from an international institutional brokerage said.

Developers had a bad year in 2008, with sales down and debt burdens mounting.
The Rs 11,000 crore or so they have raised through qualified institutional placements (QIPs) since March this year, given an upturn in the equity market, has thus been a lifesaver.But so great has been the debt bind that the realtors have used up even this money to service their loans.

“Developers who have done QIPs with a 25-30% discount to their stock price still don’t have enough money to repay their debts. Whatever projects are being launched, the upfront money paid is being spent to pay off debtors or meet interest expenses,” said an analyst from a domestic institutional brokerage.

The analyst cited the example of a south-based realtor, which has been in trouble for over a year. The company had debt of around Rs 1,900 crore before it went for a QIP. The funds raised were used to repay a part of the debt, following which the outstanding debt fell to around Rs 1,400 crore.

Interestingly, this outstanding amount includes an interest expense of Rs 200 crore — the same as the company’s earnings before interest, tax, depreciation and amortisation.
This means, whatever money the company earns will basically go towards servicing the interest on the debt, the analyst said. “How will they go around building property, for which they have already taken money?”

“One way is to sell their land bank, but they haven’t been able to find any buyers for that,” the analyst added. Talk about Ponzi schemes, wherein money brought in by new investors is used to pay off existing investors and no business model whatsoever is in place to generate returns on the funds collected.

Going by analysts, the situation is the same for a number of real estate developers.
They need to sell their existing inventory of homes to be able to raise funds to start building the homes for which they have already taken money. “They will have to sell even more to be able to build for the first buyers and this is one of the reasons why developers are hiking price bands,” said the analyst from the international institutional brokerage.
Data from the Reserve Bank of India seems to suggest that between May 23, 2008 and May 29, 2009, lending to real estate increased 52% to Rs 94,499 crore. During the same period, the overall lending by banks (excluding agriculture) went up by only 18% to Rs 25.58 lakh crore.

“If Indian government wouldn’t have come to the developers’ rescue, then some of the listed players would have had to file for bankruptcy. The real challenge now in real estate would be the next two years as now they have to tide through the market purely on the strength of selling,” said Sanjay Dutt, business-CEO, Jones Lang LaSalle Meghraj, a real estate consultant.

Yet, with property prices headed up again, increasing sales may be easier said than done. The option then would be to either dilute equity or raise more debt to pay off old debt.
So the Ponzi run may continue, though developers deny the charges.

Housing Development and Infrastructure (HDIL), which sold three properties before its QIP, says money received from the launches were solely kept for development purpose.
“Before the QIP, we had a gross debt of Rs 4,300 crore. We raised about Rs 1,600 crore and of that, 80% was used for repayments. Thus, our dues now stand at Rs 3,000 crore. So, whatever money came for residential projects is being used for scheduled construction and nothing else,” Hari Prakash Pandey, deputy general manager, finance, HDIL said. Other developers say they have sold property at lower prices to reduce debt, rather than take on more loans.

“When the market was at its worst, with everyone embroiled in negative sentiments and hardly any enquiries, forget sales taking place, the wisest option was to cut losses. We thought it prudent to sell at lower prices rather than raise debt and be burdened with interest for the rest of the period. However, as the sentiments improved, market steadied and picked up, we have increased the rates,” said Vjay V Wadhwa, chairman, Vijay Associates (Wadhwa) Developers.