Realty de­vel­op­ers are pulling out all stops to re­duce debt

Hindustan Times (Chandigarh) - Estates - - ESTATES - Mad­hurima Nandy mad­hurima.n@htlive.com

While large de­vel­op­ers are tap­ping eq­uity cap­i­tal for debt re­pay­ment, other stressed realty firms, star­ing at de­faults, are re­sort­ing to re­peated re­fi­nanc­ing of loans.

Top of­fice space de­vel­op­ers like DLF Ltd, In­di­a­b­ulls Real Es­tate Ltd (IBREL), Pres­tige Group have raised eq­uity cap­i­tal by sell­ing stake in of­fice projects, some of which will be used to re­duce debt in their res­i­den­tial port­fo­lio. Last week, IBREL signed up with Black­stone Group Lp to sell 50% of its of­fice projects in Mum­bai for Rs 4,750 crore.

The de­vel­oper, whose ren­tal projects and (res­i­den­tial) de­vel­op­ment arm has Rs 4,205 crore and Rs 5,313 crore of debt re­spec­tively, said a sub­stan­tial part of sales pro­ceeds would be uti­lized to­wards re­pay­ment of ex­ist­ing debt and for achiev­ing long-term growth.

“The mon­eyfrom the trans­ac­tion will be used in re­duc­ing debt in the res­i­den­tial port­fo­lio,” said a per­son fa­mil­iar with the com­pany’s plans, who didn’t wish to be named.

The Mum­bai-based firm also sold its Chennai town­ship project to Ozone Group for Rs 285 crore to exit a non-core mar­ket. In­dia’s largest de­vel­oper DLF Ltd, with around Rs 27,000 crore of debt as of 31 De­cem­ber, plans to re­duce debt by Rs 9,000 crore in the cur­rent fi­nan­cial year.

By March, 2019, DLF’ s res­i­den­tial de­vel­op­ment will be­come net debt zero once the ren­tal busi­ness is carved out as a sep­a­rate en­tity, Mint re­ported re­cently, af­ter DLF pro­mot­ers sold a 33.34% stake in its ren­tal arm to GIC Pte Ltd for Rs 8,900 crore. It was a game-chang­ing deal for the firm which will even­tu­ally help de-risk its balance sheet and shrink debt that have been a cause of con­cern.

Due to the on­go­ing slow­down, op­er­at­ing cash flows have re­mained weak and de­vel­op­ers are de­pen­dent on ex­ter­nal fi­nanc­ing to ease out stress. They need to raise more debt to con­struct and de­liver projects as buy­ers de­mand timely de­liv­ery. Ben­galuru’s Pres­tige Group, which signed a term sheet with GIC to sell a 40% stake in a port­fo­lio of of­fice projects for around Rs 2,000 crore, plans to stay cau­tious on its debt lev­els.

“A lot of our in­ven­tory is get­ting com­pleted and there will be a lot of cash com­ing in. Around 60% of the debt is in the lease ren­tal busi­ness and 40% is in the res­i­den­tial busi­ness. My en­deav­our is to see that (the res­i­den­tial debt) also isn’t there in the books ,” chair­man and manag­ing di­rec­tor Ir­fan Razack said.

In the new reg­u­la­tory regime, no project can be launched with­out ap­provals. Cus­tomer ad­vances, a major source of in­com­ing cash for de­vel­op­ers dur­ing launches, can’t be so­licited un­til all re­quired ap­provals are ob­tained. As a re­sult, most de­vel­op­ers have to raise ex­ter­nal fund­ing to get the project started, lead­ing to a rise in debt.

Lever­age lev­els are un­likely to re­duce any­time soon, an­a­lysts said.

“Many de­vel­op­ers have lever­aged their balance sheets to an ex­tent that has made it im­pos­si­ble for them to man­age their debt re­pay­ment sched­ules. With pres­sure to re­pay ex­ist­ing debt, many tier II and tier III de­vel­op­ers are likely to de­clare bank­ruptcy in the near fu­ture, push­ing the cause of large-scale con­sol­i­da­tion,” said Anuj Puri, chair­man, Anarock Prop­erty Con­sul­tants.

Mum­bai’s Lodha Group, which has around Rs16,500 crore of debt, plans to re­duce it by more than Rs1,000 crore in 2018-19 af­ter re­duc­ing the cost of debt by over 1%.

“From our in­ter­nal cash flows, we will now look at a mean­ing­ful re­duc­tion in debt,” manag­ing di­rec­tor Ab­hishek Lodha said.

It is ex­pected to file for an ini­tial pub­lic of­fer­ing soon and much of the pro­ceeds will be to­wards debt re­duc­tion, said mul­ti­ple peo­ple fa­mil­iar with the de­vel­op­ment.

Mid-sized firms that don’t have easy ac­cess to eq­uity cap­i­tal and have sig­nif­i­cant project in­ven­tory will need to ei­ther sell off as­sets, tie up with larger de­vel­op­ers for projects or re­fi­nance high-cost debt with low­cost cap­i­tal.

Cen­tury Real Es­tate Hold­ings Pvt. Ltd, which has Rs800 crore of debt, was plan­ning to sell some of the land parcels to pare lever­age lev­els, but manag­ing di­rec­tor Ravin­dra Pai says it’s “a dif­fi­cult mar­ket to sell land”.

Su­pertech Ltd plans to di­vest some of its shop­ping malls and ho­tels in north In­dia to raise around Rs1,000 crore, which will be used to gen­er­ate liq­uid­ity for the busi­ness and to re­duce debt, said chair­man R.K. Arora.

It also ex­pects re­ceiv­ables of around Rs1,000 crore from its projects, which could be used to re­pay debt and com­plete projects.

“Not only debt, there is stress on profit mar­gins be­cause of project de­lays and slow sales. Cost of bor­row­ing has gone down for many de­vel­op­ers as len­ders are will­ing to give money at lower rates. But with prices not ris­ing any­time soon and cost over­runs and in­ter­est costs ow­ing to projects get­ting stretched, mar­gins are get­ting squeezed,” said Shakti Nath, chair­man and manag­ing di­rec­tor, Logix Group.

In the past year or so, some de­vel­op­ers have faced in­sol­vency threats and de­fault risks. Ac­cord­ing to a pe­ti­tion filed by min­istry of cor­po­rate af­fairs (MCA), Unitech Ltd has de­faulted on deben­tures worth Rs 251.78 crore and owes small de­pos­i­tors Rs 596.76 crore.

Unite ch, whose pro­mote rs are in jail in a case of al­leged forgery and has around Rs 6,733 crore of debt, said in Jan­uary that it fi­nal­ized sale of two pieces of land in Chennai for Rs400 crore to re­fund buy­ers and for project com­ple­tion.

IN THE NEW REGIME, NO PROJECT CAN BE LAUNCHED OR CUS­TOMER AD­VANCE SO­LICITED WITH­OUT ALL AP­PROVALS IN PLACE

HT FILE PHOTO

Cash flows have re­mained weak due to the on­go­ing slow­down and de­vel­op­ers are de­pen­dent on ex­ter­nal fi­nanc­ing.

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