Rising rates add to realtors’ woes of ballooning debt

For example during 4QFY11,higher issues of non-convertible debentures (NCD) by mid-sized developers were reported. As per reports,the NCDs were priced at much higher rates than the bank loans. The developers are approaching Non Banking Financial Companies (NBFCs) to issue Non Convertible Debentures (NCD) at 16-20 per cent. As per National Securities Depository Ltd (NSDL) companies like Puravankara and Kalpatru have raised funds at 16 per cent pa while Century real estate has raised funds at 20 per cent pa. DLF also refinanced loans worth Rs 20.5 billion in the third quarter of 2010-11,while HDIL raised Rs 11.5 billion through non-convertible debentures to replay its old debt.

This is mainly due to the cautious approach by the banks to lend money to real estate companies amid a bribery probe in November and the tightening provisioning rules by the central bank. RBI has already ruled out another round of restructuring of real estate developers’ loans. Both listed and unlisted developers restructured loans worth Rs 100 billion in 2009,after RBI allowed banks to roll over the loans without treating these as non-performing assets (NPAs). Apart from this amount,developers need to repay Rs 150 billion this year. Further,in recent times the Reserve Bank of India has increased the risk weightage on housing loan to above Rs75 lakh,thus making it difficult to get loans. The repurchase rate was increased to 6.75 per cent from 6.5 per cent and the reverse repurchase rate touched 5.75 per cent,up by 25 basis points recently. Rising interest costs also will act as a double-edged sword as it will impact the demand as well as the borrowing costs. This will increase the interest cost for the real estate companies and also lower the volume sales as the buyers would be hit by the higher interest costs. This will further affect the working capital cycle of most of the builders who are still reporting negative cash flows. Further,the property prices are still outside the gamut of many investors and are waiting for a further drop in prices before buying.

PE funds exiting: REAL estate PE funds are also looking at exiting the sector. Big-ticket players like IndiaReit Fund,HDFC Venture Fund,Red Fort Capital and Kotak Realty Fund have made expected exits in the last quarter. While 2010 saw the exit of only eight realty private equity funds,the Jan-March 2011 period has already accounted for the exit of eleven real estate-focused private equity funds.

Escrow Mechanism: The Reserve Bank of India has asked banks to set up an escrow mechanism to keep a watch on loans to real estate developers meant for project development after the current scams hitting the sector.

The escrow account is opened specially for a particular project. This will ensure that the money borrowed for the purpose of development is not diverted for any other purpose. Also the homebuyers would be directed to deposit money in the escrow account so that the money is not diverted until final possession of property is handed over.

This will be beneficial to all the parties involved. It will safeguard the bank’s interests from repayment defaults and helps in monitoring the end use of funds. The developers would be able to meet their debt payment obligations and improve their cash flows.

And as far as the buyers are concerned,the project would be completed on time on account of bank funding as the flow of funds is based on previously agreed stages of work completion. Hope the government too will do its part in approving measures in tandem with the RBI to get the sector back on track.

The author is CEO,BankBazaar.com