Realty sector’s growing debt trap likely to lead to repayment crisis

Excess leverage for land accumulation, combined with lack of sales, has taken the debt levels of real estate developers to more than ₹4 lakh crore as of December-end 2017, just a little short of the telecom sector’s ₹4.5 lakh crore. As developers are unable to service debt, industry experts believe a repayment crisis could be looming large.

“The NPA problem has prompted banks to tighten their lending policies and prepare for defaults by finding alternatives to recapitalise themselves. There is a breakdown in growth driven by private debt, and it has impacted most developers, specifically the highly-leveraged ones,” Raja Seetharaman, co-founder at Propstack, a real estate analytics firm, told BusinessLine .

The total exposure of Indian lenders to real estate financing is ₹4 lakh crore, with banks contributing ₹1.8 lakh crore and housing finance companies (HFCs) and non-banking finance companies (NBFCs) contributing the the rest, a report by Ambit Capital has pointed out. The report, which draws heavily on data from Propstack, says that developer debt levels were only ₹1.5 lakh crore in FY11, which has grown over 2.5 times since then. “The combination of weak sales and weak real estate prices poses a challenge for developers. So their repayment capacity on debt obligations should come under pressure and pose challenges for banks and NBFCs that have lent to this sector,” said Ambit.

Moratorium period

Moreover, the average moratorium period (during which no interest is paid) has increased from 23 months during FY14-17 to 31 months in the first half of FY18, indicating the weak financial state of developers, it noted.

Surendra Hiranandani, CMD, House of Hiranandani, who built his business around the zero-debt model, said the recent slowdown in the industry, due to the various policy changes, has led to a further rise in debt levels and weakened the credit profile of the sector. “We have witnessed that rising defaults and debt recasts have made banks wary of lending to real estate,” he said.

Equity and partnerships

With an over-leveraged debt scenario, developers need equity but they are only able to obtain debt because private equity-structured debt players don’t want to take risk. “We think equity is a better opportunity than high-cost debt. However, equity will be available only to top-notch developers. Smaller developers have to find private investors,” said Amit Bhagat, MD and CEO, ASK Property Investment Advisors.

Moreover, there is a supply glut with unsold inventory levels as high as almost four years. “I don’t see any reason for a mid-size or small developer to differentiate and emerge a winner. They should join hands with some private individuals and recapitalise or else a stage will come when lenders will have to take a haircut, which has already started happening,” he added.

Hiranandani said getting industry status and single-window clearance are imperative for the sector’s long-term survival and growth. “In its absence, and with the stringent policy norms, developers are forced to raise external funding at high rates and comply with a rigid evaluation process, leading to a rise in debt.”

The way out for developers now is to opt for the riskier equity route or take Seetharaman’s advice: “Sacrifice short-term profits for long-term growth by partnering with better-placed developers or funds that are willing to take on the development risk.”

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