The festival season has kicked off, but the cheer is clearly missing in the real estate sector, which depends on the October-January period for 60 per cent of annual sales.
So, if Tata Housing managing director Brotin Banerjee is talking about the festive season being the “last hope” for developers, Peninsula Land executive vice-chairman Rajeev Piramal says “things will get harder” going forward.
Banerjee, of course, is excluding his company from the general sense of despondency, but says, “Nothing is selling today. If they do not reduce prices, how will they manage the finances?” He predicts a further 10-15 per cent dip in prices in the next six to eight months if sales do not pick up in the festive season. Piramal agrees with that view.
The view is endorsed by most property developers as the ground reality has hit them hard, prompting many to sell land banks and development rights to remain afloat as home sales have declined sharply.
At a time when home sales are declining, a major chunk of whatever developers earn will have to go towards debt reduction, analysts say, adding while it shows desperation, it is not necessarily a bad thing.
The country’s largest developer DLF, which had a net debt of Rs 21,524 crore as on June 30, 2011, has already said it plans to sell non-core assets worth Rs 6,000 crore to Rs 7,000 crore to become a net debt-free company in the next three years.
Though DLF plans to reduce its debt by Rs 3,000 crore by the end of this financial year, stock brokerage Emkay believes the company should generate Rs 1,000 crore from core operations in FY 2012 while the rest has to come from sale of non-core assets.
DLF is in the final stages of selling two IT parks in Pune and Noida respectively to global investor Blackstone and private equity firm IDFC, where it is expected to earn around Rs 1,500 crore. While DLF has sold 10.8 acres in Gurgaon to a Dubai-based investor for Rs 280 crore, it is in talks with another NRI investor to sell another 20 acres in Gurgaon for around Rs 400 crore.
DB Realty, whose key promoters are in jail in connection with the 2G scam, recently sold 50 per cent stake in its South Mumbai project and is in talks with Mumbai-based realty firm Rustomjee to do joint ventures in two of its planned projects in Mumbai.
Another property developer Emaar MGF, which could not float its IPO due to various reasons, sold its land parcels in Kolkata and Gurgaon and is looking to sell majority stakes in some yet to be developed projects, say sources in the know. Omaxe, which raised Rs 60 crore last year from selling land, is looking at selling land parcels in Tier-III towns such as Visakhapatnam, Bahadurgarh and Sonepat this financial year to raise additional resources.
If they are selling land parcels, HDIL, the country’s fifth-largest property developer, is looking to sell floor space index (FSI) in projects located in Goregaon and Virar projects, both Mumbai’s western suburbs, according to sources. The sale is expected to fetch around Rs 450 crore to the company. FSI means permissible construction allowed on a given plot of land and it is allowed to be traded.
According to PropEquity, a realty research firm, the number of homes sold and registered in the Mumbai Metropolitan Region (MMR), declined over 40 per cent at 5,455 units in August 2011 compared to 9,357 units sold in the same month last year. Sequentially, home sales dipped 7 per cent over the preceding months.
In the National Capital Region (NCR), the fall in the number of homes sold was sharper — 52 per cent in August 2011.
But, as in the initial days of the 2008 crisis, most developers are refusing to reduce apartment prices and prefer to give selective 5-10 per cent “discounts”. “There is a slowdown. But till date, they (developers) have not reduced prices. Maybe they have so much margin that they can afford to hold on,” says V K Sharma, CEO, LIC Housing Finance.
This is despite the fact that many developers are not getting bank funding, which they normally use to finance construction. “Banks have adopted a stricter and more vigilant approach towards the real estate sector for new loan disbursement or refinancing,” says Sandipan Pal, a research analyst with Motilal Oswal.
The central bank has increased interest rates a dozen times in the last 18 months, which has pushed the borrowing cost of property developers up by two-four per cent. Barring a few, most developers are raising funds at 13-14 per cent.
The tight liquidity conditions have also forced many developers to borrow funds from non-banking finance companies at 16 to 22 per cent, private equity at 25 to 30 per cent and private lenders at 25 to 35 per cent.
The qualified institutional placement route, which developers used to raise funds earlier, is not available this time given the volatility in stock markets. While the benchmark index Sensex has fallen from the peak of January 8, 2008, stocks of top realty companies have fallen 80-95 per cent.
Everyone agrees developers should not be foolhardy and should reduce prices. R K Bansal, executive director and group head (retail banking), IDBI Bank, says the demand for loans is likely to remain subdued during this festive season unless developers in cities like Delhi and Mumbai do something about it.
Joe Silva, chairman of Eredene Capital-backed Tanaji Malusare City(TMC), says the situation has reached a “breaking point”. “If there is an external trigger like a sovereign crisis in Europe or market failure of individual buyers, the correction could be as high as 30 per cent,” says Silva. That’s not something developers want to hear.
