Realty de­vel­op­ers seen af­fected by drop in re­fi­nanc­ing deals as lenders ex­er­cise cau­tion

Hindustan Times (Chandigarh) - Estates - - FRONT PAGE - Mad­hurima Nandy mad­

BENGALURU : Re­fi­nanc­ing trans­ac­tions, the life­line for the realty sec­tor, have dropped by al­most 50%, com­pared with a year ago, when such deals were at their peak, sig­nalling poor qual­ity of projects, cou­pled with slow sales and high debt.

In the past two years, de­vel­op­ers mainly relied on re­fi­nanc­ing to meet their debt ser­vic­ing obli­ga­tions and, some­times, to re­duce cost of debt, given cash flow con­straints. Such re­fi­nanc­ing pro­vided a cush­ion for de­vel­op­ers to hold prices de­spite slow­ing sales.

Of late, non-bank­ing fi­nan­cial com­pa­nies (NBFCs) and pri­vate eq­ui­ty­funds—the­main­sourceof fund­ing in real es­tate, with banks be­ing cau­tious—have be­come more pru­dent about tak­ing on re­fi­nanc­ing risks.

“In the quest for rapid growth in mar­ket share and as­sets un­der man­age­ment in re­cent years, a few lenders lent to de­vel­op­ers in ex­cess of the value of the un­der­ly­ing as­sets or projects. Sev­eral de­vel­op­ers gladly took the en­hanced debt, used that money for un­pro­duc­tive uses and are now faced with im­mi­nent de­fault af­ter sev­eral rounds of re­fi­nanc­ing and sev­eral years of in­ter­est ser­vic­ing. The fact that sales price has come down moder­ately has only wors­ened mat­ters for lender’s cover on these projects,” said Amar Merani, man­ag­ing di­rec­tor and CEO, Xan­der Fi­nance Pvt. Ltd.

There are sev­eral projects that can’t af­ford to take in­cre­men­tal debt and can’t be re­fi­nanced by a new lender since they’re lever­aged to the top. What hap­pens to the huge in­ven­tory and sup­ply in these stalled projects is any­body’s guess.

As a re­sult, ex­its may also get de­layed be­cause with project cash flows be­ing weak, lenders may not find new in­vestors to step in.

“Re­fi­nanc­ing trans­ac­tions have dropped dra­mat­i­cally, by more than 50%, com­pared with two years ago. Home sales are still slow, new projects are not be­ing launched and so there’s not much se­cu­rity that’s left in a project, or with the de­vel­oper to of­fer. Real es­tate is all about pric­ing; so wher­ever the de­vel­oper feels he can’t sell, he is re­duc­ing prices, which helps him to pay off the debt (to lenders) for a quar­ter,” said Am­bar Ma­hesh­wari, chief ex­ec­u­tive (pri­vate eq­uity), In­di­a­b­ulls As­set Man­age­ment Co. Ltd.

Sev­eral de­vel­op­ers have done mul­ti­ple rounds of re­fi­nanc­ing, of­ten for the same project, in 5-6 years and now that re­fi­nance is very tough to do due to lack of ad­e­quate se­cu­rity cover, stressed firms will be pushed to do joint de­vel­op­ment agree­ments with branded tier I de­vel­op­ers in the post RERA regime.

“...I see quite a lot of stressed de­vel­op­ers not want­ing to cede con­trol or eco­nomics to these large tier I de­vel­op­ers. If they don’t tie up very soon, there is just no op­tion but to sell in­ven­tory at clear­ing (low) prices, col­lect funds and con­tinue to con­struct, de­liver,” Merani said.

Liq­uid­ity over prof­itabil­ity will have to be the strat­egy for many of the trou­bled de­vel­op­ers and as a re­sult, apart­ment prices may come down fur­ther af­ter 3-6 months, prop­erty con­sul­tants say, es­pe­cially in the over­sup­plied mi­cro mar­kets of Mum­bai and Na­tional Cap­i­tal Re­gion. This is par­tic­u­larly true of the lux­ury seg­ment where prices are ex­pected to re­duce even fur­ther due to near ab­sence of buy­ers at cur­rent lev­els.

“NBFCs will en­joy their run for some time, till the sec­tor re­vives and bank fund­ing opens up. But de­vel­op­ers will face mar­gin pres­sure if they have to sell at lower prices,” said Ram Ya­dav, chief ex­ec­u­tive of­fi­cer, Edel­weiss Real Es­tate Ad­vi­sory Prac­tice.

Amit Goenka, man­ag­ing di­rec­tor and chief ex­ec­u­tive of Nisus Fi­nance Ser­vices Co. Pvt. Ltd (Nifco), said cap­i­tal flows are grav­i­tat­ing to­wards more or­ga­nized and fo­cused play­ers.

“Fund­ing hav­ing sig­nif­i­cantly dried up from the bank­ing sec­tor may fur­ther dry up from NBFCs, funds and pri­vate cap­i­tal providers too, for the small­sized de­vel­op­ers. The cost of cap­i­tal to good de­vel­op­ers will come down and more cap­i­tal will be avail­able to the bet­ter play­ers, in­creas­ing ticket sizes per deal,” Goenka said.

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