By 11 June, 2009

India's real estate firms are seeking share sales to settle debt and meet working capital needs as valuations improve, but the funds won't be enough to salvage them if sales don't pick up, say industry watchers.

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Since the start of 2009, almost $1.7 billion has been raised by home builders, according to Thomson Reuters data, while up to $2 billion more has been called for by realtors via share sales, especially qualified institutional placements (QIPs).

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"It is an over-leveraged market...the overall market is too huge. This (money) is nothing. It's small peanuts. It won't suffice," Pankaj Kapoor, founder of Liases Foras Real Estate Rating & Research, said.

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Realty firms piled up debt as they rushed to launch projects amidst a three-year bull run in the sector. But, sales began slumping in 2008 amid a global meltdown and reluctance among buyers at higher prices, leading to a severe cash crunch.

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Sentiment improved with the successful share sales by Indiabulls Real Estate, Unitech and India's largest listed real estate firm DLF, prompting more builders to seek board approval to raise money via share placements.

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"They don't have an option," Shobhit Agarwal, Joint Managing Director, Capital Markets, Jones Lang LaSalle Meghraj, said, referring to QIPs. "If you go to private equity, which is the other extreme, this kind of size is not available."

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"They have no further capacity to raise debt... or to service that debt," he added.

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Outstanding bank loans to real estate firms rose to 623 billion rupees in FY08, up about 38 percent from a year earlier, the latest central bank data shows. Confederation of Real Estate Developer's Association of India (CREDAI) estimates that listed companies account for over half of those loans.

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DEMAND REVIVAL?

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Sales are trickling back as realtors focus on medium to low-priced houses, redesigning projects and cutting prices by as much as 40 percent in some markets, but most buyers appear to be flighty investors, suggesting that recovery may be months away.

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Residences account for the bulk of real estate up for sale and select projects across India are seeing a revival of demand, developers say.

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Equity analysts remain sceptical even about firms that were successful in raising money.

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Indiabulls Real Estate's share issue brought down promoter holding to about 16.7 percent said a Motilal Oswal June report, "however, till date no concrete plans on the usage of the QIP proceeds have been shared."

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Stock investors have pushed up the industry's market value but analysts don't think the rise can be sustained. India's realty index is up almost threefold from March.

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With most stocks trading at NAV (net asset value) premiums and equity dilution a likely overhang, we view risk/reward as unfavorable, Karishma Solanki, analyst at Citi said in a June report.

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India's property market pick-up is typically seen starting from Mumbai, then Delhi, followed by the southern markets, Jones Lang's Agarwal said.

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But, the future still rests on revival of demand and a further price correction to bring back fundamentals.

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The only thing that will bring back efficiencies into the (realty) market is sales," said Liases Foras' Kapoor. "For that prices have to come down, because until they come down, the buyer will not be motivated to come and purchase."

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