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Rs 30k-cr realty debt at risk of high refinancing cost: Crisil

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Mumbai: Rating agency Crisil has warned that Rs 30,000 crore debt of the top 25 realtors is at the risk of higher refinancing cost amid a continued slump in the realty space owing to high prices and dependence of the companies on high-return demanding private equity players.

“An analysis of the top 25 realtors, comprising around 95 per cent of the market capitalisation of the sector, shows that Rs 30,000 crore of their debt obligations will face high refinancing risks with demand in respective markets expected to be tepid over medium-term,” Crisil said in a note today.

These 25 developers account for half of bank lending to the sector, and most of those facing high refinancing risk are in Delhi-NCR, Crisil said. With the net exposure of banks to the realty sector expected to come down by 5 per cent for the first time this fiscal, an increasing proportion of the funding gap is being bridged by costlier NCDs and private equity money, it said.


Banks met around 90 per cent of the requirement of these realtors till last year. The report expects the demand revival and price increases to be marginal in the medium term, thereby further narrowing the cashflow. However, most of the realtors have been in the past two years refinancing their principal and interest obligations by leveraging the cushion available in their operational commercial portfolio.

But the problem gets compounded with construction cost outpacing customer advances of late, and the developers seem to be caught in a debt spiral, says the Crisil report. However, the report notes that the recent regulatory measures like FDI relaxation and recourse to funding through non-convertible debentures and private equity are expected to provide some respite in the short-term.

“The flip side, however, is the high returns expected by private equity investors compared with the relatively low cost of bank loans. “Assuming this to be 20 per cent per annum, the cumulative payout by the sector over a five-year horizon can be as high as Rs 85,000 crore. This can amplify refinancing risks…unless demand picks up substantially,” the report warned.

Stagnating collections in the wake of declining sales has resulted in debt taken for residential projects by these developers surging by 25 per cent to Rs 61,500 crore in FY15. Increasing their problem is the declining saleability of residential projects, especially in the Northern market.

Another area of concern is inventory, which surged to 58 and 48 months in the North and West respectively at the end 2014-15. The Southern market has a more comfortable 22 months of inventory. According to the report, the silver lining is that demand for residential projects, which was wallowing in negative territory in the last couple of years, is expected to turn around mildly, barring in Delhi-NCR, driven by government initiatives and macroeconomic improvement.

“Cities such as Mumbai will benefit from infrastructure projects already announced, which will improve connectivity and boost absorption. On the other hand, NCR, which is typically investor-driven, will see limited demand growth.” With regard to average capital values in the six cities, these are expected to rise slightly in the near term.

Large planned supplies and considerable inventory overhang would preclude significant appreciation in prices. Commercial lease rentals, too, will remain stable because of large planned supplies.