Rs 30,000 crore debt risk stares at real estate firms
As much as Rs 30,000 crore of debt obligations of 25 real estate companies, mostly based in the National Capital Region, will face high refinancing risk with demand in their respective markets expected to be tepid over the medium term, rating agency Crisil has said.
Stagnating collections in the wake of declining sales velocity had resulted in debt taken for residential projects by these developers surging by 25 per cent to Rs 61,500 crore in fiscal 2015, Crisil said in an analysis of India’s top 25 realtors, comprising 95 per cent of the market capitalisation of the sector. “The past two years have seen realtors refinancing principal and interest obligations, some by leveraging the cushion available in their operational commercial portfolio. Add to that the problem of construction cost outpacing customer advances lately, and developers seem to be caught in a debt spiral,” Crisil said.
According to Crisil, recent regulatory measures such as relaxation in foreign direct investment, and recourse to funding through non-convertible debentures (NCDs) and private equity, are expected to provide some respite in the short term for the sector. The flipside is the high returns expected by private equity investors compared with the relatively low cost of bank loans. “Assuming this to be 20 per cent per annum, the cumulative payout by the sector over a 5-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 substantially,” it said.
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 NCR. With net exposure of banks expected to decline by 5 per cent for the first time in the current fiscal — banks used to meet 90 per cent of the requirements of these realtors till last year — an increasing proportion of the funding gap is being bridged by costlier NCDs and private equity monies.”
It said saleability of projects has also been declining, especially in north India. Another area of concern is inventory, which surged to 58 and 48 months, respectively, in the north and west at the end of fiscal 2015. South India had a more comfortable 22 months of inventory.
The silver lining is that demand for residential projects, which was wallowing in negative territory , is expected to turn around mildly — barring NCR that is – driven by government initiatives and macro-economic improvement.