India Real Estate: A Failed Business Model
Equity market down, liquidity drying; listed ones sell land or try refinance as unlisted ones bite their nails
The struggle by property developers to repay the debt load they'd taken in brighter times continues. Unlisted property developers are likely to have a problem, even as big listed ones are selling land parcels to meet repayment obligations for the financial year 2010-2011.
For, while the listed developers such as Unitech, HDIL, Parsvnath, etc raised funds through equity via qualified institutional placement (QIP), unlisted companies which were planning initial public offers (IPOs) to finance their projects and deleverage their books are yet to float these, given the volatility in the markets. Over half-a-dozen real estate companies have got final approval from the market regulator to launch IPOs but are waiting for markets to improve. These include Raheja Universal, Lodha Developers, Lavasa Corporation and Kumar Urban Development. Together, they were looking to raise Rs 9,000 crore from markets.
Lodha Developers, which borrowed Rs 1,640 crore from Deutsche Bank in 2007, repaid Rs 850 crore in December 2010 and has planned to repay around Rs 700 crore in three to six months. The draft prospectus it filed with the the Securities and Exchange Board of India (Sebi) shows it plans to use Rs 157 crore from IPO proceeds to repay or prepay debt in 2010-11.
Emaar MGF is planning to raise Rs 1,600 crore through an IPO and is yet to get a Sebi nod for this. It plans to use Rs 614 crore from the IPO to repay or prepay debt. The Delhi-based developer needs to repay Rs 1,199 crore by March 2011.
Cash flow pressure "With correction in stock prices, the ability of unlisted developers to raise funds, either through IPO or private equity, is affected. With increase in interest rates, both the demand for properties and home prices can come down, which may affect their cash flows. Hence, some unlisted developers might find it difficult to meet their repayment obligations,'' said Vikas Agarwal, senior vice president, Icra, a rating firm.
The BSE Realty Index, which tracks the movement in realty stocks, has fallen 30 per cent since the beginning of the current financial year, showing investor apathy in realty stocks.
Home sales in Mumbai have dropped to half, compared to the beginning of 2010, as property prices in key areas have risen 40-45 per cent. Those in the National Capital Region are stable due to slow growth in prices, according to recent data from PropEquity, a realty research firm.
An Emaar MGF spokesperson did not respond to a mail on the subject, while a Lodha executive said: "We have no issues with repayments. We are most comfortable on this front.''
But analysts do not see a rosy picture ahead. "Real estate companies planning IPOs in 2011 may experience a lack of enthusiasm on the part of investors due to the lending scams uncovered in India in Q4 of 2010. Any failure to raise funds through the equity markets would increase real estate companies' dependence on banks and increase their vulnerability to RBI (Reserve Bank of India) action,'' said analysts from international rating firm Fitch, in a recent report.
"Nobody knows how much debt these unlisted firms have piled up or how much they need to pay in FY 2011. Barring Emaar MGF, nobody has filed a revised DRHP (draft prospectus) after September 30, 2010,'' says an analyst from a Mumbai-based brokerage who did not want to be identified.
Bank finance drying Public sector banks have already tightened lending to real estate firms and are asking for additional collateral and putting completion guarantee clauses for real estate developers in the aftermath of the bribe for loan scam. With the RBI asking banks to moderate credit growth, the flow to the real estate sector may be further tightened, say analysts.
RBI has already ruled out another round of restructuring of real estate developers' loans. Both listed and unlisted developers restructured loans worth Rs 10,000 crore in 2009, after RBI allowed banks to roll over the loans without treating these as non-performing assets (NPAs). Apart from this amount, developers need to repay Rs 15,000 crore this year.
"Since RBI has refused further concessions, either developers have to pay their dues or get their loans classified as NPAs. But banks do not want NPAs and hence the pressure is on developers,'' says Pranay Vakil, chairman of Knight Frank India, a global property consultant. "They (banks) will also review the advances given to developers in greater detail.''
Refinancing picks up With repayment schedules fast approaching, most developers are refinancing their old loans with new ones of longer tenures. DLF, the country's largest developer, refinanced loans worth Rs 2,046 crore in the third quarter of 2010-11. Last year, HDIL, the country's third largest developer, raised Rs 1,150 crore through non-convertible debentures to retire the high-cost debt it had taken from banks. It has raised a similar amount through qualified institutional placement (QIP) of shares.
However, HDIL is a one-off case, as developers are raising debt at high rates, given the overall increase in interest rates. For instance, DLF's cost of debt has gone up from 10.5 per cent in September 2010 to 10.8 per cent in December 2010. Smaller ones are seeing steeper increases. Omaxe, another Delhi-based developer, has seen a 1-1.5 per cent increase in cost of borrowing in the current financial year. Currently, its average cost is 14.3 per cent.
"The weighted average cost of capital of banks has gone up by 200 basis points in the last one year. How can banks lend at lower rates?" says Shobhit Agarwal, joint managing director, capital markets, Jones Lang LaSalle, an international property consultant.
Vakil says some unlisted developers are also borrowing at steep rates of above 20 per cent to meet their requirements. "These are the unsecured borrowing from HNIs. Anyone borrowing at these rates is sending a danger signal and showing severe pressure on them,'' says Vakil.
Realty companies are also borrowing funds from portfolio managers and private equity funds at high rates. In September last year, Kotak Realty Fund invested Rs 250 crore in two projects of Emaar MGF, by subscribing to non-covertible debentures. The NCDs carried a rate of 20 per cent. HDFC Venture funds invested Rs 500 crore in World One project of Lodha, by picking up 10 per cent stake in it.
Land sales DLF, the country's largest property developer, sold land parcels worth Rs 403 crore in Pune, Amritsar and New Gurgaon, in the third quarter. The company plans to continue such sales in other parts of the country. It repaid Rs 2,680 crore of loans in the third quarter out of Rs 2,890 crore it needed to pay during the quarter. It needs to repay Rs 2,700 crore in 2011-12. HDIL recently sold its Popular Car Bazaar land in Andheri to the Mumbai-based Kanakiya Group for Rs 800 crore and another land parcel in Goregaon for Rs 600 crore. It plans to use the proceeds to repay debt.
"We have rental inflows of Rs 1,500 crore every year. Even if we do lease rental discounting for six years, we can mop up Rs 10,000 crore and we can repay half our debt. The balance Rs 3,000-4,0000 crore we can reduce by selling non-core assets, land parcels,'' said a senior executive from DLF.
HDIL is following a similar strategy. "We are looking at both residential sales and FSI (floor space index) sales to generate cash flows. We will take a call in our next board meeting on whether to use positive cash flows from FSI or residential sale to reduce our debt," said Hari Prakash Pandey, vice-president (finance), HDIL, in a recent interview to this paper. HDIL has total debt of Rs 4,000 crore on its books and needs to repay Rs 150 crore by March 2011.
But unlisted ones have a limited land bank and can't raise much by such sales. "Large players have built their land bank over the years and even if they sell some non-contiguous land, it will not affect their project pipeline, but this is not the case with unlisted companies,'' says an analyst from a Mumbai-based brokerage.
Some forward looking statements on projections, estimates, expectations & outlook are included to enable a better comprehension of the Company prospects. Actual results may, however, differ materially from those stated on account of factors such as changes in government regulations, tax regimes, economic developments within India and the countries within which the Company conducts its business, exchange rate and interest rate movements, impact of competing products and their pricing, product demand and supply constraints.
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