Another realty firm defaults: Home buyers should cheer

The pops you are hearing are signs of the real estate bubble beginning to burst. Not only are sales dipping despite a slew of launches and correction in prices, but real estate companies are finding it increasingly difficult to pay interest on loans. Some are defaulting.

That may be bad news for realty tycoons and banks, but good news for buyers. The more the sector comes under pressure, the more realty prices will come down as builders are forced to disgorge inventories to up cash flows.

A report in the Economic Times today pointed out that Bangalore-based real estate major Century Real Estate defaulted on its debentures.

Even though the debenture issue is secured against several land parcels in Bangalore, investors will lose the time-value of their money and credit rating agencies will surely downgrade the company too.

More from Business

Hyundai India’s Rs 27,870 crore IPO oversubscribed by 2.28X, largely driven by institutional investors How Indian fintech startups are driving Malaysia’s UPI-like digital payments revolution

[caption id=“attachment_606114” align=“alignleft” width=“380”] Real estate firms are highly leveraged. However, of late, the cash-crunch has come home to roost as builders are finding it increasingly difficult to hold on to properties. Reuters[/caption]

Real estate firms are highly leveraged. However, of late, the cash-crunch has come home to roost as builders are finding it increasingly difficult to hold on to properties with bank funding drying up and developers turning to primary markets to pay off old loans.

The Reserve Bank of India has refused to allow banks to restructure loans to real estate companies without provisioning for potential losses in case of defaults. Restructuring would have allowed builders room to repay on new terms and conditions. Now,with capital constraints, they may have to sell inventory at lower prices.

Impact Shorts

More Shorts

Chennai Ranks #1 in Challan Checks: ACKO Insights for Smarter Car and Two Wheeler Insurance Decisions

Tata Harrier EV vs Mahindra XEV 9e: Design and road presence compared

Builders can very well afford to sell at a corrected price (and still make profits), but a lot of black factors enable them hold on to the prices or even increase them.

But this may be changing soon as the realty index not only underperformed the Nifty in January, but a few companies were even forced to sell shares to bridge the funding gap and finance new acquisitions.

Shares in Housing Development & Infrastructure in the last week have tanked 30 percent as a partial stake sale by the Vice-Chairman and Managing Director Sarang Wadhawan as well as Citigroup Global Markets Mauritius Private raised led to worries that other stakeholders would also offload shares. Business Line, however, reports that the fall implies early warning sign of default.

“This move also indicates that the company’s debt repayments could get tighter from here on and could be seen as an early sign of default,” the report said.

HDIL’s total consolidated net debt was at around Rs 3,800 crore as of September 2012. The reduction of debt hinges on cash flows from two Mumbai-based projects - Guru Ashish (Goregaon) and Metropolis (Andheri).

Builders in Noida too have reportedly defaulted on repaying dues worth Rs 3,000 crore for plots that were allotted during the BSP regime after payment of just 10 percent of the total amount as down payment, according to this Times of India report.

The report further said that apart from monthly instalments, many builders are not even paying the 14 percent interest they have to shell out if they default on payments.

While this may be bad news for lenders who are finding it increasingly difficult to recover their loans, it is positive for buyers as builders may now be forced to cut property rates.

Already prices have softened in Mumbai in the December quarter, signalling a further correction in the market.

According to property consulting firm Liases Foras, home prices in the Mumbai Metropolitan region have dropped by 1 percent in the last quarter.

The Managing Director of Liases Foras, Pankaj Kapoor, said that this correction in price, albeit marginal, is a good sign for home buyers.

“Besides, 11,000 new residential projects were launched this year. The piling up of housing stock has only led to a decline in skyrocketing prices. Also, developers are already facing a liquidity crunch,” said Kapoor. “The marginal fall will be welcomed by buyers looking for affordable houses.”

The city has seen the highest number of new launches since the recession of 2008-09, Kapoor said.But the prices of new launches were 24 percent lower than those of the existing supply, indicating signs of correction and increase in affordable housing.

Developers with large projects in Mumbai are offering lower prices through soft launches during the pre-sale period. These prices were earlier offered only to investors but are now available for retail buyers (end-users) too.

For instance, Lodha’s premium project in Worli called BlueMoon was offering discounts of up to Rs 5,000 per square feet to those who book their apartments between 18-28 January. At a time when properties in Worli are being pegged at Rs 29,000 per square feet, Lodha is offering two, three and four-bedroom apartments in two towers with a starting price of Rs 23,991 per square foot with its new IPO-like pre-launch scheme. As expected, the scheme was a success since Lodha received 1,300 applications from prospective buyers for an upcoming realty project, which is more than double the number of units up for sale.

In the affordable segment, RNA andShree Naman Group have slashed prices of their projects in Gurgaon and Elphinstone, respectively. While RNA has lowered prices from Rs 11,750 per sq ft to Rs 9,950 per square foot in its Exotica Project in Goregaon, prices at Naman Midtown, Elphinstone, range between Rs 20,750 and Rs 22,500 per square foot, from Rs 22,750 and Rs 27,000 earlier.

Other realtors too are negotiating with buyers discreetly as they are faced with a liquidity crunch and rising cost of capital.

And now that RBI has decided to cut interest rates, some buyers may return to to the market.

The developers’ body has termed the RBI policy as a small, but good beginning.

“The CRR rate cut should boost liquidity in the real estate market, thereby releasing the pressure off cash-strapped developers”, Paras Gundecha, President of MCHI-CREDAI, said.

Last year was particularly bad for the real estate sector with very few new project launches due to tight liquidity conditions and a fall in sale volume.

The RBI’s policy is definitely a key to boosting real estate market sentiment and sending out positive signals to global investors and end-users, said Shobhit Agarwal, Managing Director - Capital Markets, Jones Lang LaSalle India.