A major cash crunch in the economy along with a drop in property sales is proving to be a double whammy for realtors who are now defaulting on bank loans, suggesting that the situation may be getting out of control for India's real estate sector.
Real estate firms are finding it difficult to meet repayment commitments due to the visible slowdown in sales and the fact that majority of banks have virtually stopped fresh loan disbursals. Add to that the fact that RBI has ruled out further restructuring of realty loans. The number of new projects too have nearly halved due to the difficulty in getting funds.
According to a report in the Business Standardbanks may further tighten the screw on India's unregulated real estate sector by asking for higher collateral which will make it more difficult for the industry to borrow loans.
That may be bad news for realty tycoons 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 K Prabhakar, senior vice-president, equity research, Anand Rathi Financial Services, told BS: "Once the names of defaulters come out, the prices of properties will shake. Those under distress will cut prices.
On Tuesday, Mumbai-based real estate firm Orbit Corp was issued a notice of default and loan recovery to the tune of Rs 96 crore by LIC Housing Finance.
The company has failed to pay up the amount even after getting a extension of six months.
Not only did the company fail to repay the loan amount, it has also defaulted on the interest payable on the loan amount.
While LIC Housing Finance has classified the account as a non-performing asset, it has also restrained the developer from creating any third-party rights on over 2.40 lakh sq ft across three of its projects that were mortgaged for securing the loan, says this Economic Times report.
The housing finance company has also curbed Orbit Corp's sale of flats in three Mumbai projects, which are located at Andheri, Lower Parel and Lalbaug, reported CNBC-TV18 today.
"The company took a loan of Rs 250 crore from LIC, of which it has repaid about Rs 150 crore but didn't pay up the rest as projects have been held up because of delays in obtaining regulatory permissions, impacting cashflows," Orbit managing director Pujit Aggarwal was quoted as saying in theMint.
But Orbit is not the first to grapple with a liquidity crunch.
Even Indiabulls Financial Services on Tuesday alleged that real estate major Housing Development and Infrastructure Ltd's (HDIL) promoters Sarang and Rakesh Wadhwan have failed to pay interest worth Rs 3.5 crore accrued on their personal loan worth Rs 46 crore.
According to a CNBC-TV18 report, Indiabulls Housing Finance has given them 60 days time to clear dues. If they fail to pay up, the company may proceed to take possession of mortgaged property in Goa.
Their loan accounts have now been classified as non-performing asset.
The Wadhwans have said that the matter concerns only the promoters and not the company but the news does spell trouble for HDIL as investors in the past toohave been worried about the ability of the company to sort out its finances.
Last month, Mumbai International Airport Pvt Ltd (MIAL), which runs Chhatrapati Shivaji International Airport in Mumbai, claimed damages of Rs 276.46 crore from HDIL for delaying the first phase of construction at the airport. In May, MIAL terminated the slum rehabilitation contract given to the company, forcing the real estate firm to write off the costs incurred and report a loss for the March quarter.
The stock is down 10 percent today after hitting a record low of Rs 28.10 in morning trades. Even DLF tanked 6 percent today and is down nearly30 percent in the past eight trading sessions, after Citigroup downgraded it to "sell" from "neutral", citinghigh leverage, mounting interest costs, tough macro situation and slowing demand.
Other real estate stocks too are trading at historic lows todayon concerns that there is no chance of the interest costs declining in the near future as the rupee hit new low of 61.70 against dollar today.
Pankaj Kapoor, chief executive of Liases Foras, a real estate research agency, told Firstpost that home sales have gone down in recent months as there are barely any investors interested in entering the market right now while the current home valuations, especially in Mumbai and NCR are unaffordable for end users.
"Some of the developers are over-leveraged due to a constraint in cash flows because of slowdown in sales and difficulty in getting loans. Add to that the fact that private equity players are all looking to exit their investments now. With no money coming in, real estate is in dire straits," he said.
In fact data provided by real estate research firm Jones Lang LaSalle Indiashows foreign money in real estate is at an all-time low. From its peak of$5,500 million in FY10, FDI in real estate in FY13 is down to just $1,500.
"Even affordable housing projects are failing to strike a chord with investors owing to the low yield and long gestation period involved," saidShobhit Agarwal Managing Director - Capital Markets, Jones Lang LaSalle India.
In other words, developers are holding on to inventory with unproductive prices, which implies that the market has to undergo a correction.
Clearly, it is just the unexplained and continuous increase in the price of land that is allowing realtors in Mumbai and the NCR to survive for neither sale of apartments or rentals will keep them afloat in the current gloom and doom.
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Updated Date: Dec 20, 2014 22:38:38 IST