India’s top 25 developers will find it tough to refinance Rs 30,000 crore ($4.5 billion) of debt as sales remain tepid, ratings firm CRISIL has warned.
Sales across realty markets have been slow for the past many quarters, leading to a cash flow crunch for developers. In the absence of advances from customers, developers have refinanced their debt multiple times by issuing non-convertible debentures (NCDs) to non-banking finance companies and private equity funds. PE firms have increasingly started backing projects through structured debt instead of equity transactions.
CRISIL said that, over the past two years, realtors refinanced principal and interest obligations with some of them leveraging the cushion available in their operational commercial portfolio. Developers seem to be in a debt spiral now as construction cost has outpaced customer advances lately.
The top 25 developers constitute 95 per cent of the sector’s market capitalization and account for half of bank lending, the ratings firm said.
Sushmita Majumdar, director at CRISIL Ratings, said that banks met 90 per cent requirement of these realtors last year and that the lenders’ net exposure will likely decline, for the first time, by 5 per cent in the current fiscal year. The funding gap is increasingly being bridged by NCDs and PE money, she added.
Majumdar said also that most developers facing a high refinancing risk are in the National Capital Region.
The slowdown in the sector has affected the NCR market the most, with sales slumping over the past many quarters and inventory touching an alarming level. Some north India-based developers who have raised debt in the recent past include Saya Homes, Orris Infrastructure and Supertech.
Although funding through NCDs and PE capital and recent regulatory measures such as a relaxation in foreign direct investment (FDI) norms may provide some respite in the short run, but the flip side is that this money is costlier than bank loans, CRISIL said.
“Assuming the expected return to be 20 per cent annually, the cumulative payout by the sector over a five-year horizon can be as high as Rs 85,000 crore. This can amplify refinancing risks by an order of magnitude unless demand picks up significantly,” it said.
In the fiscal year 2014-15, the debt taken for residential projects by these developers jumped 25 per cent to Rs 61,500 crore, the report said.
Slow sales have also pushed the level of unsold stock higher with NCR faring poorer on this count, too. Inventory in northern and western India was 58 and 48 months, respectively, at the end of 2014-15 while the southern region maintained a more comfortable inventory of 22 months.
Binaifer Jehani, director at CRISIL Research, said that the NCR market, which is typically investor driven, will see limited growth in demand. Mumbai, on the other hand, will benefit from infrastructure projects that will improve connectivity and boost absorption.
Jehani said also that average capital values in the six cities – Mumbai, NCR, Bangalore, Pune, Chennai and Hyderabad – may rise a tad in the near term. However, prices won’t rise significantly due to large planned supplies and inventory overhang. “Commercial lease rentals too will remain stable because of large planned supplies,” he added.
On a positive note, the report said that demand for residential projects will likely turn around mildly – barring NCR – driven by government initiatives and macro-economic improvements.
The CRISIL report comes after real estate consultancy Jones Lang Lasalle and research firm Liases Foras separately noted a silver lining in the market earlier this month. According to JLL, the NCR market clocked an uptick in sales in recent months thanks mainly to the festival season. Liases Foras also said that top realty markets had shown some signs of improvements with sales jumping 17 per cent in the July-September quarter.
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