NBFC crisis is forcing cash-strapped developers to resort to distress sales as they need liquidity for meeting operational expenses. Some are cutting housing prices by up to 20 per cent under deals that can be closed within a month.
“With the disbursement freeze by NBFCs, developers are struggling to secure liquidity. They are being compelled to cut prices to ensure equilibrium in cash flows for paying construction overheads, salaries and meet other day-to-day expenses,” Parth Mehta, Managing Director at Paradigm Realty told BusinessLine .
Buyers – only source of funds
Investor buyers, who formed a stable funding source for developers, disappeared post demonetisation as realty turned an end user market. So majority of the projects were now being financed by NBFCs or construction finance, which was easily available to one and all. “Even development, which did not have super class asset, was getting easily funded. Now, there is high level of distress, forcing developers who have not been financially prudent, to resort to sales at any price to get cash flows,” he added.
Pankaj Kapoor, MD at Liases Foras said there may be a correction in prices of both ready and under construction properties. “Earlier, the disbursement from NBFCs took care of operations but now since that has stopped, developers need to increase sales and get cash. This may trigger a good price correction,” he said.
Mehta pointed out that HFC and NBFC funding to home buyers has also come under the cloud now. “When home loan disbursement is slow, developers are choosing to cut prices and sell to equity buyers as money inflow is certain in those cases,” he said. However, these price cuts are not being advertised as it will further worsen market sentiments and adversely affect the sector. “But buyers can strike a deal if they go with a plan to make payments in a short timeline,” Mehta added.
Dire Straits
As per Anarock data, more than 5.75 lakh residential units are running behind schedule across the top seven cities since their launch in 2013 or before. The major factor contributing to this delay is the liquidity crunch developers are experiencing due to tepid sales. “Apart from weak residential sales, increasing input costs and promotion expenses coupled with the high compliance costs will result in decreased earnings,” Shobhit Agarwal, MD & CEO, Anarock Capital said.
Samantak Das, Chief Economist and Head of Research at JLL India said while this will be a short-term crisis, with no systemic risk, developers will have to face some struggle. “It has come at a time when residential market was just coming back, showing green shoots. At this time, it is detrimental, but developers have faced such crisis in the past too and come out of it. This knee jerk reaction could have been avoided,” he said.
“Financially prudent builders will come out unscathed but those who have not been careful in finance deployment will have to bear the brunt of this cycle,” Mehta added.