Realty players sit on Rs 45k cr of debt; expect 2011 gloom to continue

Mumbai: The real estate industry went through a tough phase in the past year, with mounting unsold inventories and a rising debt burden, and is not very optimistic about the new year, considering the rough patch the economy has entered into.

Analysts, however, expect an improvement in terms of completion of existing projects as developers are likely to focus on execution and timely delivery during the new year.2011 witnessed high unsold inventories and delays in project execution due to continuous interest rate hikes by the Reserve Bank, forcing buyers to delay purchases, leading to a liquidity crunch for the developers, who also saw construction cost go up on account of increased raw material costs.

[caption id=“attachment_169624” align=“alignleft” width=“380” caption=“The near-term outlook for residential real estate market is likely to remain cautious in 2012, given the likelihood of low market sentiment. Reuters”]  [/caption]

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The realty industry is right now sitting on a debt pile of close to Rs 45,000 crore. This is despite the fact that the Reserve Bank had put in place a number of measures to prevent a bubble in the industry. Significantly, most of the amount is held by unlisted players and the advances are from NBFCs.

According to statistics, gross bank lending to the real estate sector grew 11.6 percent between October, 2010, and October, 2011, compared to 15.7 percent during the year-ago period. Similarly, FDI flows into the sector witnessed a 26 percent decline on an annual basis.

In addition, regulatory bottlenecks like delays in project approvals and land acquisition-related uncertainties, especially in the major metros, resulted in unease among developers, forcing them to go slow on launches.

“The near-term outlook for residential real estate market is likely to remain cautious in 2012, given the likelihood of low market sentiment,” PropEquity Chief Executive Samir Jasuja said.

Key market indicators, including absorption and new launches, are likely to remain low, given the execution concerns, he added. Jasuja said developers may focus on execution and timely delivery in 2012 and not getting into new launches to avoid an

inventory overhang. Meanwhile, experts say there are expectations of the RBI cutting interest rates in the near future.

“The expectations of lowering of interest rates, coupled with softening of construction costs, is expected to boost the end-user demand for housing in 2012,” Sare Homes Executive Director David Walker said.

In 2011, residential prices continued to move upward in major residential markets across the country like the Delhi-NCR, Mumbai, Bangalore, Pune, Kolkata and Chennai,

resulting in higher unsold inventories. The Delhi-NCR region reported the maximum unsold inventory level in residential real estate at 1,02,758 units, followed by the Mumbai Metropolitan Region (Mumbai, Navi Mumbai and Thane) with 90,512 unsold units. The number stood at 46,596 units in Bangalore and 40,734 in Pune.

The liquidity crunch will continue to be a major cause of concern for developers in 2012 as well, given the fact that banks are very cautious on lending to realty projects. “Since the banks had lowered their lending for RE projects, developers had to depend on private equity and FDI for raising funds to complete their projects, who charge nearly 18-30 percent interest rates on their lendings,” Maharashtra Chamber of Commerce and Industry President Paras Gundecha said.

He said if a 2011-like situation continues on the bank-lending front, developers will not have an option but to raise funds through the PE and FDI routes, which are costly.

“This will force them to either maintain or at times marginally increase the prices. However, a decline in pricescould be developer-specific and may be a result of factors

including his price-holding capacity (depending on the debt level and working capital) and future projects in the pipeline,” Gundecha said.

However, the European crisis and regulatory changes have left foreign investors skeptical about the market, he said, adding, “We can only expect the situation to improve.” In 2012, the industry is expecting reforms from the government side that will smoothen the process of getting approvals for projects.

“It is imperative that the government promotes housing by increasing FSI limits, freeing non-development zones and salt pans in land-starved Mumbai, besides bringing in a balanced urban master plan with a thrust of civic infrastructure investment to decongest cities,” RNA Corporation Vice-President for Corporate Planning and Strategy Manoj John said.

PTI