Refinancing problem for realty majors: CRISIL

Construction cost outpacing customer advances adds to firms' woes

With tepid demand for space, especially in the housing segment, the country’s top 25 real estate companies are staring at a problem in refinancing debt worth a combined Rs 30,000 crore over the medium term, according to rating agency CRISIL.

The past two years have seen realtors refinancing their principal and interest obligations, some by leveraging the cushion available in their operational commercial portfolio. Add the problem of construction cost outpacing customer advances lately and developers seem caught in a debt spiral.

Recent regulatory steps such as relaxation in foreign direct investment rules, recourse to funding through non-convertible debentures (NCDs) and private equity might provide some respite in the short term. The flip side is the high returns expected by private equity (PE) investors, compared with the relatively low cost of bank loans. Assuming this to be 20 per cent annually, cumulative payout by the sector over five years could be as high as Rs 85,000 crore.

This can amplify refinancing risks, unless demand picks up substantially. Sushmita Majumdar, Director, CRISIL Ratings said: “These 25 developers account for half of bank lending to the sector. And, most of those facing a high refinancing risk are in the National Capital Region (NCR).”

The net exposure of banks to the sector is expected to decline by five per cent this financial year; they used to meet 90 per cent of the requirements of these realtors till last year. That means, a rising proportion of the funding gap is being bridged by costlier NCDs and PE monies, CRISIL said.

  Stagnating collections in the wake of a declining sales velocity had resulted in debt taken for residential projects by these developers surging by 25 per cent to Rs 61,500 crore in 2014-15.  Sales in projects has also been declining, especially in the north. Another area of concern is inventory, which surged to 58 and 48 months, respectively, in the north and west by end-March 2015. South India had a more comfortable 22 months of inventory.

The silver lining is that demand for housing, in negative territory for the past two years, is expected to turn around mildly, barring in the NCR. Driven, said CRISIL, by government initiatives and macro economic improvement.