Realty is in trouble: Buyer boycott has not abated

No money, no buyers and plateauing real estate prices imply deep trouble for real estate developers. They are no longer clinching deals at current high prices.

In the last four months, at least four companies have defaulted on debt-servicing obligations as bank credit has dried up and sales volumes have slowed down.

Today’s Economic Times validates this point as another Mumbai-based builder, Mantri Realty, has not paid interest on its loan for the last five months after asking non-banking financial company SE Investments to factor in its Rs 4 crore fixed deposit while calculating interest on a Rs 19-crore loan.

[caption id=“attachment_728499” align=“alignleft” width=“380”] In the last four months, at least four companies have defaulted on debt-servicing obligations as bank credit has dried up and sales volumes have slowed down. Reuters[/caption]

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“The developer has moved the court seeking appointment of an arbitrator, while Delhi-based SE Investments has moved the court to restrain Mantri from selling 32 apartments,” said the ET report. Interestingly, the fight over interest payout comes to light on the same day when Mantri announced plans to launch six housing projects within the next three to four months to develop 2,300 flats across the country with an investment of about Rs 1,500 crore. Of the total investment, Rs 300-500 crore is expected to be raised as debt from banks, while the rest will come from internal accruals and customer bookings.

But given the fact that customer demand has not revived at current price points, the company’s fund-raising plans remain doubtful.

Anshul Jain, chief executive of DTZ India, part of DTZ International Property Advisors Pvt. Ltd, said liquidity or availability of cash is the key challenge for most developers, both large and mid-sized. While it is important for developers to service debt, the companies should also be able to sufficiently generate cash to run their businesses, he said.

In the past, HDIL’s non-convertible debentures worth Rs 2,095 crore were downgraded by CARE to default rating, while Hubtown (formerly Ackruti) was downgraded following reports of defaults on borrowings by Brickwork Ratings. Century Real Estate, a Bangalore-based realtor, failed to pay interest in time on one such bond issue placed with investors by Kotak Mahindra Prime, a non-banking finance company, in January. Buyers in Noida are sitting on huge EMIs for flats that may not see the light of the day any time soon as developers are defaulting big-time on payment of monthly instalments to the Noida authority.

The cash pressure for builders is so much that developers are now offering the 20:80 scheme for luxury projects too! Known as ‘subvention schemes’, 20:80 means you pay 20 percent upfront and the rest on possession. It offers a relaxation period from the date of purchase and has the benefit of appreciation of property during that time. On the other hand, end-user purchases in the affordable market, at least in NCR and Mumbai, are on hold unless builders lower prices by at least 10 percent.

The tightening of purse strings by lenders has only worked to re-emphasise the need for real estate developers to manage their project costs and to rationalise the selling prices of projects. While there has been a dip in demand in recent months, developers are unwilling to scale back their over-inflated prices, and this could bring in the next round of defaults.