Ind-Ra: Refinancing Risk of Real Estate Developers Seen Rising in FY18

Falling sales have dimmed hopes of cash-strapped real estate developers for refinancing their debt obligations in FY18, says India Ratings and Research (India Ratings). The real estate sector has mainly relied on refinancing to meet its debt servicing obligations, given the negative cash flows. Such refinancing has provided a cushion for developers to hold prices despite slowing sales, and the high prices will further delay recovery in sales and cash flows. Ind-Ra believes sales are unlikely to revive in FY18 and refinancing will increasingly become difficult.

India Ratings had highlighted that real estate developers have been less reliant on bank credit and the growth in banking credit to the commercial real estate sector slowed down in FY17, with a growth of mere 0.4% since the start of the fiscal till 20 January 2017. The report had also highlighted that significant interest had been observed from non-banking finance companies and private equity investors for refinancing debt in the last three years.

 

Ind Ra notes that, finances of real estate developers continue to remain stretched due to elevated inventory and debt. India Ratings estimates that debt levels will further rise given the negative operating cash flows.

The Indian real estate market is currently grappling with a double whammy, one from the cash shortage caused by the impact of demonetisation and the second by the imminent introduction of the Real Estate Regulator (RERA). This, along with the increasing refinancing risk, would shake-up the sector, with developers with high leverage losing out. The sector also needs to undergo a structural change in the way it does business and move towards a model where projects are completed before sale. Such a structure would favour real estate companies having better access to funding. Larger players with access to multiple funding sources, such as NBFCs, PE funds and FDI in addition to banks are likely to have an advantage. This could lead to consolidation, which may be in the form of land sales or joint development of land with larger organised and well-funded developers.

This will usher in a new phase for the sector which is overcrowded with plenty of players with weak financials. We are likely to witness a series of joint developments and joint ventures between landowners and financially weak small developers with bigger, better-funded, better-organised players or weaker developers getting taken over by well-funded larger players, and struggling developers cashing in their land banks by selling them to players with stronger balance sheets and appetite for growth.

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