http://www.livemint.com/Companies/9z19V20YNM8zm27FFnSdnM/Realty-firms-face-risk-in-refinancing-Rs30000-crore-debt-s.html
Bengaluru: India’s top 25 property developers, which account for nearly 95% market capitalization in the real estate sector, are likely to face risks in refinancing aboutRs.30,000 crore of debt, ratings firm Crisil said in a report on Wednesday.
The slowdown in demand over the past two years has led to a sharp fall in customer advances, even as developers are compelled to continue constructing ongoing projects, setting off a vicious debt cycle that has forced them to bank on expensive alternative sources of finance to meet the funding gap.
Realty firms have been refinancing principal and interest obligations, some by leveraging the cushion available in their operational commercial portfolio. To aggravate this, the problem of building cost outpacing customer advances has trapped developers in a debt spiral.
The sector has seen one of its longest slowdown cycles, lasting over two years, with residential sales still tepid in large property markets such as the National Capital Region (NCR) and Mumbai Metropolitan Region (MMR). Financial flexibility of these developers, who account for around 50% of total outstanding bank debt to the sector, will remain under pressure because of stressed balance sheets, high inventory and tepid demand.
The funding gap is expected to remain high in the current fiscal, and with banks shying away, realtors have had to resort to costlier external sources of finance. The net exposure of banks to the real estate sector declined by 100 basis points in the first half of the current fiscal. One basis point is one-hundredth of a percentage point.
“These 25 developers account for half of bank lending to the real estate sector. And most of those facing high refinancing risk are in the National Capital Region. With net exposure of banks expected to decline by 5% for the first time in the current fiscal—banks met 90% of the requirements of these realtors till last year—an increasing proportion of the funding gap is being bridged by costlier NCDs (non-convertible debentures) and private equity monies,” said Sushmita Majumdar, director, Crisil Ratings.
NCR, the country’s largest property market, has seen a steady decline in home sales. Sales dropped 66% over three years ended 31 March, mainly due to weak demand.
In the last few years or so, NCDs have been the most used route of private equity (PE) funds and non-banking financial companies (NBFC) lending to the sector. Developers have raised debt by issuing NCDs to make payments for land, project development and to refinance existing loans.
However, this alternative funding has come at a high price. About one-third of the NCD issuances last fiscal yielded an internal rate of return of more than 20%. Crisil estimates payout for PE funds in the sector as a whole at Rs.85,000 crore, assuming a return of 20% over five years.
“There is a fair amount of funds waiting to be deployed in real estate but much of this money is also chasing top grade, good quality developers with a good credit record. The main concern today is how long will this slow cycle continue, because, till then, cash flows will remain weak, though developers have the option of raising debt at a higher cost,” said Chintan Patel, partner, transactions and restructuring, real estate and hospitality at KPMG India, a consultancy firm.
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