Realtors Sense Debt Vice Tightening
For those booking properties this year, hoping they would get possession of their
homes in the next two years may be left somewhat disappointed, say analysts. The reason being, real estate developers have used up the money paid upfront by home buyers to pay back debt rather than build houses, a senior research analyst from an international institutional brokerage said.Developers have had a bad year in 2008, with sales going down and increasing burden of debts. Rs. 11, 000 crore or so was raised via qualified institutional placements (QIPs) since March this year, given an upturn in the equity Market and has thus been a lifesaver. However, so great has been the debt bind that the realtors even used up this money to check their loans.
An analyst from a domestic institutional brokerage said that developers who had done QIPs with a 25-30% discount to their stock price still didnt have enough money to repay their debts.
It doesnt matter what projects are being launched, the upfront money paid is being spent to pay off debtors or meet interest expenses.
The analyst referred to a case in point, of a south-based realtor, which had been in trouble for over a year. The company had a debt of around Rs 1,900 crore before it went for a QIP. The money raised was used to repay a part of the debt, following which the outstanding debt fell to around Rs 1,400 crore.
Interestingly, this outstanding amount was inclusive of an interest expense of Rs 200 crore similar to a companys earnings before interest, tax, and depreciation and paying back. This meant that whatever money the company earned would principally go towards servicing the interest on the debt. The analyst also asked how they would go around building property, for which they had already taken money.
He added that one way was to sell off their land, but they were not able to find any buyers for that, as well. In the Ponzi schemes, money is brought in by new investors and is used to pay off existing investors and no Business model whatsoever is in place to create returns on the funds collected.
Analysts say that the situation was the same for a number of real estate developers. They need to sell their existing inventory of homes to be able to elevate funds to start building the homes for which the money had already been taken. They would have to sell all the more to be able to build for the first buyers and this is one of the reasons why developers are hiking price brands, an analyst from the international institutional brokerage said.
Data provided by the Reserve Bank of India, implied that between May 23, 2008 and May 29, 2009, lending to real estate increased 52% to Rs 94, 499 crore. At the same time, the overall lending by banks (not including agriculture) short up by only 18% to Rs 25.58 lakh crore.
If the Indian government wouldnt have come to the developers rescue, then some of the players listed would have had to file for bankruptcy. The real challenge now in real estate would be the next two years as now they would have to tide through the market purely on the strength of selling, said Sanjay Dutt CEO of global real consultancy Jones Lang LaSalle Meghraj.
Nevertheless, with property prices climbing heights again, rising sales would have been easier said than done. The option then would be to either to weaken equity or raise more debt to pay off previous debts. Subsequently, the Ponzi run may have continued, though developers denied charges.
Housing Development and Infrastructure (HDIL), which sold three properties before its QIP, said money received from the launches was solely kept for the development purpose. Hari Prakash Pandey, deputy general manager, finance, HDIL mentioned that before the QIP, they had a gross debt of Rs 4,300 crore and they raised about Rs 1,600 crore and of that 80% was used for repayments. Thus, their dues now stood at Rs 3,000 crore. Hence, whatever money came for residential projects was being used for scheduled construction and nothing else. Other developers said that they had sold property at lower prices to reduce debt, rather than take on more loans.
When the market was at its worst, with everyone involved in negative sentiments and hardly any enquiries, the wisest alternative was to slash losses, said Vijay V Wadhwa, chairman of Vijay associates (Wadhwa) Developers. He added, we thought it wise to sell at lower prices rather than raise debt and be loaded with interest for the rest of the period. However, as the sentiments improved, market stabled and picked up, we increased the rates, added Wadhwa.
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