 "Realty sector stares at more defaults")
“Cash flows of many realty companies are 20-30 per cent of their total indebtedness. Even if they sell assets and take a haircut, that does not seem enough to pay back their loans,” said Amit Goenka, managing director and chief executive officer, Essel Financial Services, part of the Essel group. “There would be more defaults, as the Reserve Bank (RBI) has ruled out further restructuring. The markets have also not improved.”
Early this year, rating agency Brickwork downgraded Mumbai-based Hubtown for defaulting on repayment of interest and principal on Rs 100 crore of non-convertible debentures (NCDs). Early this month, Indiabulls Housing Finance declared Rakeshkumar Wadhawan and Sarang Wadhawan, promoters of realty company HDIL, as loan defaulters. Their loan accounts have been classified as non-performing assets (NPAs).
| BAD STATE |
|
On Monday, LIC Housing Finance said Orbit Corporation had defaulted on interest and principal dues of Rs 96 crore to it and declared the account an NPA. Early this year, it was reported that Tata Capital dragged Hirco Plc’s Hiranandani Palace Garden to court for default on repayment of interest and principal of Rs 100 crore towards NCDs.
A K Prabhakar, senior vice-president, equity research, Anand Rathi Financial Services, said: “Once the names of defaulters come out, the prices of properties will shake. Those under distress will cut prices. But that does not mean buyers will buy. If interest rates go up, that will create a negative impact in the market.” Some say bankers would become stricter in lending to developers.
“It (defaults) means banks will become more judicious and ask for higher collateral. It will become difficult for the industry as a whole to borrow loans,” said Shobhit Agarwal, managing director, capital markets, at Jones Lang LaSalle. He said as listed companies had also defaulted on payments, loan agreements will become uniformly stringent for all developers.
“Earlier, AAA-rated developers could get different agreements and treatments. Bankers might do away with that practice,” Agarwal said.
ALSO READ: Five BSE sectoral indices hit 52-week low
According to RBI data, credit to the commercial estate sector grew 15.4 per cent in the 12 months till June 2013, to Rs 1,33,900 crore from the Rs 1,16,000 crore in June 2012. The rise was 10.9 per cent in the June 2011-June 2012 period.
Lower sales and high indebtedness is said to be the reason behind defaults in the sector. Property registration in Mumbai saw flat growth in June after 15-20 per cent growth in April and May. In a business environment marked with default risks, banks are trying to minimise hit to balance sheets. M Anjaneya Prasad, executive director, Syndicate Bank, said his bank is concentrating on residential segment, especially small and medium builders. The sale of dwellings is better and they are able to service the repayments obligations. Essel Finance’s Goenka says most projects are loaded with debt, on the assumption that these would have a 100 per cent run rate in terms of sales and cash flows.
“Even 10 to 20% downside in sales or pricing would create mismatch in repayment. If that downside goes up to 70 to 80%, it would have huge negative variants on business plans,” Goenka said.