Real estate sector could be grinding to a halt in some parts of India.
By Sreekanth A Nair
An analysis of Credit Rating Information Services of India Limited (CRISIL) shows that India’s top 25 real estate companies comprising 95 percent of the market share face high refinancing risks from around Rs 30000 crore of debt obligations since demand in their respective markets is expected to be low over the medium term.
In the past two years, the real estate companies have seen refinancing principle and interest obligations by leveraging the cushion available in their operational commercial portfolio. But increasing construction cost and late payment of customer advances will make the situation worse.
The report says that recent regulatory measures such as relaxation in Foreign Direct Investment (FDI), and recourse to funding through Non-Convertible Debentures (NCDs) and private equity are expected to provide some relief to the sector in the short term.
“The flipside, however, is the high returns expected by the private equity investors compared with the relatively low cost of bank loans. Assuming this to be 20% per annum, the cumulative payout by the sector over a 5-year horizon can be as high as 85000 crores. This can amplify refinancing risk by an order of magnitude unless demand picks up substantially” says the report.
Sushmita Majumdar, Director, CRISIL Ratings said, “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 (NCR). With net exposure of banks expected to decline by 5% for the first time in the current fiscal-banks used to meet 90% of the requirements of the realtors till the last year an increasing proportion of the funding gap is being bridged by costlier NCDs and private equity monies.”
According to the analysis, stagnating collections in the wake of declining sales velocity had resulted in debt taken for residential projects by these developers surging by 21% to Rs 61500 crore in fiscal 2015. Stability of projects has also been declining.
“Cities such as Mumbai will benefit from infrastructure projects already announced, which will improve connectivity and boost absorption. On the other hand, NCR, which is typically investor driven will see limited demand growth,” said Binaifer Jehani, Director, Crisil Research.
CRISIL is of the view that with relaxed FDI norms and other regulatory proposals such as real estate bill, and initiatives on affordable housing and implementation of the Real Estate Investment Trust (REIT) can solve demand and funding issues.