The real estate sector which has been reeling under pressure due to liquidity crunch might face further problems if demand in the sector does not revive soon. According to credit rating agency Crisil, some realtors received a short reprieve in the form of qualified institutional placements (QIPs) this year but liquidity would again be a problem if demand does not rise substantially. Till mid-August 2009, four real estate players have raised funds through QIP — Unitech (two issues), Indiabulls Real Estate, HDIL and Sobha Developers. QIP involves the issue of fresh equity or non convertible debentures with warrants, or convertible securities other than warrants, to qualified institutional buyers (QIBs) in order to arrange long-term funds by diluting the stake of current shareholders.

The promoters of DLF Ltd also offloaded some part of their stake to QIBs, but not through QIP, as the existing equity was diluted and no fresh issues were made. QIPs have improved the leverage ratios of developers and also improved the overall outlook of investors towards real estate. However, Crisil says that this is only a short-term solution, and if the real estate sector has to recover from the serious miscalculations made in the past, a strong rebound in demand is imperative. Many developers had stretched their balance sheets to support their aggressive land buying spree and consequently the sector had to battle a tight liquidity scenario for some quarters, Crisil said.

However, subsequent to the downturn which began in early 2008, real estate developers began facing a liquidity crisis. To developers who had been facing severe liquidity crunch during the first quarter of 2009, the flurry of QIP issues in the second and third quarters came as a good opportunity to raise funds, with enthusiastic response from subscribers. Although QIP is an easy way to generate funds, it results in the dilution of stake of equity shareholders. Consequently, promoters lose their control over the company, and public shareholding also declines proportionately. For example, the promoter’s shareholding in Unitech Ltd declined from 64.5 per cent to 43.8 per cent after two successive QIP issues.