Top listed developers in India have been successful in reducing their consolidated net debt levels by over 40 percent over the last three years through cost efficiencies by reducing overheads, generating operating cash surplus, asset sales, and capital raising.

Data show that aggregate net debt levels of the top ten listed developers fell 42.7 per cent to ₹24,938 crore between end of FY20 and the third quarter of FY23. This excludes listed real estate investment trusts and the debt of DLF Cyber City Developers, the commercial arm of DLF Ltd. If DLF Cyber City’s debt is included, then the aggregate debt of the companies at the end of December 2022 comes to ₹43,332 crore — a fall of about 20 per cent during the period under review.

The top ten listed developers are DLF, Godrej Properties, Oberoi Realty, Macrotech Developers, Phoenix Mills, Prestige Estates, Sobha Ltd, Brigade Enterprises, Sunteck Realty and Mahindra Lifespaces.

Financial prudence helps

Among the main reasons for the steep fall in debt is the good balance sheet discipline that companies have been exercising through a 10-15 per cent reduction in their overheads, according to broker ICICI Securities.

The sudden turnaround in the real estate sector with demand for homes taking off during Covid helped companies in boosting their cash flows. Companies that were highly leveraged such as Macrotech Developers, Sobha Ltd, and DLF  took advantage of the upsurge in sales to pay down their debt. According to Jefferies, operational cash flows of the companies is estimated to have risen nearly 2.5 times between FY21 and FY23.

The companies have also maintained discipline by following through on their execution and ensuring that the quality of their pre-sales are sustained through actual end-users. By utilising their existing land banks, opting to buy land from developers struggling with cash and entering into joint development agreements, the listed developers have ensured a conservative approach to cash usage.

Some of the companies such as Sobha, for instance, have been monetising surplus land and assets through asset sales and using the proceeds to reduce their overall leverage. Raising funds through qualified institutional placements and non-convertible debentures or dilution of stakes at the level of special purpose vehicles have helped the companies in bolstering their balance sheets. The low interest rates during 2020 and 2021 helped the developers in keeping their costs of borrowing low.

Analysts said that these factors have resulted in leaner balance sheets for listed developers and put them in a strong position to invest in growth in the medium-term, giving them the headroom to accelerate the pace of consolidation in the sector.

Although the cost of debt has risen by 40-130 basis points in the first nine months of FY23 with the Reserve Bank of India increasing the repo rate by 250 bps since May last year, developers anticipated this and have already undertaken debt reduction strategies. With their focus on sustaining cash flows over the next three to four years, developers have been snapping up land parcels at fairly reasonable valuations.

Commentaries from companies over the past few months indicate that they intend to be selective while buying land, looking for stressed assets and distressed sales and also roping in private equity partners to fund asset purchases.

DLF and Lodha intend to further bring down their debt levels over the next couple of years and focus on their core markets. DLF is restricting itself mainly to expanding in the National Capital Region, while Lodha is also focused on the Mumbai Metropolitan Region. Though Godrej Properties and Prestige Estates are expanding pan-India they are keeping a close watch over their balance sheets.

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