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It is a matter of concern that
credit growth, both for home loans and on the exposure to real
estate developers, has hit a speed breaker due to repeated
interest rate hikes. Industry statistics show the growth rate of
loans to developers came down from 43 percent in January to just
11 percent in May this year.
Similarly, home loan growth has also dropped significantly during
the same period. And the Reserve Bank of India's latest directive
to banks to adopt strict lending norms, especially with regard to
loan documents, may well further tighten the liquidity
environment.
What is further adding to the woes of real estate companies is the
overhanging debt. In 2010-11, the cumulative debt of leading
listed companies like DLF, Unitech, HDIL, Sobha and Godrej topped
Rs.34,000 crore. And despite availing corporate debt
restructuring, many real estate companies are not able to
significantly reduce their debt.
Apart from scarce bank credit, sluggish stock market has further
restricted the real estate developers' options to raise funds.
About a dozen developers' plan to raise money through initial
public offerings has got stuck as they do not want to incur the
risk of low valuations and lukewarm response. The investors'
appetite for public issues is simply not there.
At the same time, now that stock market is not doing well, people
are wary of investing money into real estate. Even the
profit-hungry high net worth individuals are turning to
specialised options such as offshore funds, which do well in terms
of returns even when there is a market slowdown.
In this backdrop, fund-starved real estate companies -- finding
customer advances insufficient to carry out their construction
activity -- are now increasingly depending on private equity
players and non-banking finance companies, even if the funding is
sourced through receivable financing route. Their desperation
level can also be judged from the fact that a few smaller real
estate companies are borrowing money from the market at a rate as
high as 24 percent.
With customer advances shrinking in view of slow home sales due to
the high property prices and increasing loan rates, debt-ridden
developers are resorting to selling their land assets for raising
money to complete their projects. An industry study indicates that
in view of increased project delivery commitments and cost
escalation in construction, 480,000 residential units are likely
to face delays in execution during the period of 2011-13.
A number of developers, especially in the National Capital Region
and Mumbai, are resorting to unhealthy practice of underwriting.
They are selling a substantial part of their inventory to
financiers and speculators on assured return basis, at the
pre-launch stage. Later, the launch price is hiked to give
investors their promised margin. It is to safeguard the interest
of these investors that developers do not offer price cuts and
instead hold on to properties despite slowdown in sales, thereby
inviting the risk of speculative bubble.
It is not just the working capital crunch that is unnerving the
real estate developers. The construction-cost inflation, coupled
with rising interest costs have badly impacted the profit margins
of real estate firms. The cost of debt from banks has gone up by
2-2.5 percent and from non-banking sources by about 6 percent in a
year.
As business sentiment dips amid worsening macro-economic scenario,
coupled with persistent inflation and mounting finance costs,
cautious optimism is giving way to concern. It is now really a
worrying fact that consumption growth has moderated due to
constantly rising inflation and high interest rates.
The government's policy of taming inflation by increasing rates at
regular intervals has not worked. In fact, this has resulted in
choking real estate supply and curbing demand. There is a need for
a pragmatic policy that desists from continuous increase in
interest rates and instead works towards boosting supply and
consumption.
(Vinod Behl is
editor of Realty Plus monthly. He can be reached at vbehl2008@gmail.com)
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