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Real estate developers are set to face a liquidity crunch yet again. Over the one week, the sector has been hit with two developments – the passage of the Land Acquisition Rehabilitation and Resettlement Bill in Parliament and the Reserve Bank of India cautioning banks on innovative home loan products.
Both these measures will impact the financials of real estate developers in over the short and medium term. The RBI’s commentary will curtail the flow of cheap money to builders and the cash-strapped ones in a corner.
The new Land Acquisition Act will, of course, make land much more expensive. While one is beneficial to the sector as a whole, especially for those who are sitting on historical land banks, the other will have an adverse impact on liquidity.
Both these measures will impact the financials of real estate developers in over the short and medium term. The RBI’s commentary will curtail the flow of cheap money to builders and the cash-strapped ones in a corner.
The new Land Acquisition Act will, of course, make land much more expensive. While one is beneficial to the sector as a whole, especially for those who are sitting on historical land banks, the other will have an adverse impact on liquidity.
For starters, the new land acquisition Act will impact companies that have to acquire large tracts of land from private parties. One of the companies that may be affected by this Act is Mahindra Lifespace.
According to ICICIDirect, the company could see some delay in the North Chennai SEZ project as the company has acquired 500 acres of the total 750 acres of the project. However, the project’s contribution to overall valuation is minimal.
The Act would require companies to pay compensation that would be four times the market cost of the land if it is in rural areas and twice the market rate if it is in urban. Not only this, for land tracts over 50 acres in urban and 100 acres in rural ares would require consent of at least 80% of people.
According to ICICIDirect, the company could see some delay in the North Chennai SEZ project as the company has acquired 500 acres of the total 750 acres of the project. However, the project’s contribution to overall valuation is minimal.
The Act would require companies to pay compensation that would be four times the market cost of the land if it is in rural areas and twice the market rate if it is in urban. Not only this, for land tracts over 50 acres in urban and 100 acres in rural ares would require consent of at least 80% of people.
However, developers are under the impression that acquisition of land which is below 50 acres would not come under the purview of the land.
The sector will see a more immediate impact with RBI discouraging the loan products where the developer gets the money upfront from the bank even before construction starts and the buyer pays only 20% upfront. Now RBI has linked disbursal to construction progress. The developers may suddenly be faced with a cash crunch again and this may result in prices coming down in areas like NCR and Mumbai, where ticket prices are high for properties.
According to Citi, the ban will impact the already weak residential demand and adversely impact the cash flows of levered developers like DLF. Going by the uncertainties, analysts continue to recommend companies like Sobha (with a comfortable leverage position), Oberoi (debt free) and Mahindra Lifespace (with a debt to equity of 1.1x).
