Inflation pressures dampen the party for real estate developers.
The real estate industry, which has seen some demand revival in recent times with the easing of fund flows, may have to prepare for tough times, going ahead. The easing of rates from banks, private equity investors and capital market, and the possible hardening of policy rates, proposal for replacement of base rate with prime lending rate and less investor appetite for real estate IPOs in the capital market could together complicate matters.
Things may turn bad for some of the real estate developers due to repayment pressures on their restructured loans during recession and the inflationary pressures in the market.
“Inflationary pressures in the real estate market may prompt the Reserve Bank of India to take corrective measures like higher risk provisioning or higher risk weight for real estate lending which will increase the cost of lending,” H S Upendra Kamath, executive director, Canara Bank, said.
Presently, risk provisioning for banks for real estate lending at 1 per cent of the loan and 100 per cent in risk weight category. Any further rise in these categories will push up cost of lending for banks and is expected to be passed on to developers.
“Implementation of base rate instead of prime lending rate will further jack up cost of lending to this sector,” Kamath said. Usually, real estate developers have to pay above the benchmark prime lending rate at the time of borrowing from banks.
He also said, the exposure of Canara Bank to commercial real estate was less than Rs 2,500 crore as of now and the bank was taking a cautious approach towards lending to the sector.
He, however, said that banking industry could opt for real estate bonds due to attractive coupon rates and higher returns.
Referring to the issue, S C Kalia, executive director, Union Bank, said, “We do have an active lending programme for real estate sector depending on the profile of the group and its financials.”
Real estate developers had to go through bad times during the economic slowdown (from middle of 2008 to first half of 2009) due to a slump in demand, high debt burden and poor liquidity in the system.
However, things have started looking up for the sector with the revival in demand and the greater economic activity. As per the RBI data, bank credit to real estate sector has reached Rs 88,581 crore by November, 2009, a 15.3 per cent rise over the corresponding period last year.
“Bank credit to this sector has increased with the fall in debt burden for most real estate developers,” Karun Varma, Managing Director of Jones Lang LaSalle Meghraj, Bangalore said.
Notwithstanding the impending tightening of fund flows into the sector, the players witnessed decent sales during the last quarter. Many players say they are not required to go in for distress sales of their land bank, or raise private equity in a hurry any more. For some established players, the sales has been quite good that they are of the view that the payout of principal and interest on their debt during the present calendar is not a cause for worry, “as the cash flow is healthy”, which is leading to the easing of debt burden.
Bangalore-based Puravankara Projects has now a debt burden of around Rs 800 crore with a debt to equity ratio of less than one. As the company has a sound order book, it gives it the leverage to raise more funds. Similarly, Brigade Developers has a debt burden of Rs 300-400 crore and its debt, equity ratio is at less than one level with good sale proceeds.
Sobha Developers, ano-ther Bangalore-based deve-loper, has a debt burden of around Rs 1,400 crore with a leverage of 1.4. The company, earlier, had a qualified institutional placement (QIP) issue of Rs 560 crore with sale of some of its land bank worth Rs 60-65 crore to repay a part of its debt.
India’s largest real estate developer, DLF is actively looking at a stake sale in some of its non-core business to repay part of its Rs 16,000 crore debt. Unitech Ltd, which has a debt burden of Rs 6,200 crore by December, 2009 with a debt to equity ratio of 1.6 is planning to repay some of its debt by sale of non-core business.
“The debt burden was a cause of concern at the time of recession which has definitely come down in recent time and also generous restructuring of loan book by banks during slowdown has given some breathing space to this sector,” Jay Mabani, partner, KPMG said.
However, there is less investors’ appetite both in retail and institutional seg-ment for real estate IPOs and QIPs, he said.
“There was a pent up demand, which had driven the sector in the last half of 2009. However, demands seem to be weak in first three mon-ths of 2010 due to the high prices of properties. As ample liquidity in the system is pushing up prices, RBI may take some measures to arrest this,” he added.
He also said that PE investors were increasingly asking for a structured equity transaction with assured return to invest in real estate companies.
“If there is bubble in the market, then fund raising will be an issue for the developers,” Mabani said.
