Sunday, June 15, 2008

Real estate sector facing severe cash crunch

The recent bloodbath in the real estate sector has started taking a toll. Almost all large developers are now facing a severe cash crunch and finding it difficult to complete their ongoing projects. In fact, the situation is so bad that most of them have reported a 50-70% cash shortfall. Industry sources told SundayET that the liquidity crunch has forced many developers to pick up cash from the unorganised market at interest rates as high as 35% to 50% annually. The lending rate of banks is between 18% and 20%.

The grade A developers which are facing crash crunch include DLF, MGF Emaar, Shobha Developers, Unitech, Omaxe, Parsvnath Developers, Hiranandani Group, Ansal API, BPTP Developers and TDI Group.

As a result of the crash crunch many developers have started going slow or even stopped construction of projects which are either in their initial stages of development or which would not affect their bottomline in the near future. While most developers that SundayET spoke to, agreed with the problem at hand, none of them were ready to be quoted on how it had affected them.

“There are visible signs that the global liquidity crunch has started to impact real estate companies in India. It is becoming extremely difficult for both small and large realty companies to organise financing, given the global liquidity crisis. The recent slowdown in demand, high interest rates, rising input costs and meltdown of realty stocks have only added to their problems. The real estate companies are in dire need for credit and other sources of capital to complete projects at hand and also to sustain their expansion plans. Some companies are able to access capital, albeit at very high costs, which in the long run may not be a sustainable solution, especially given the size of the market and consequent need for large chunks of capital,” says Cushman & Wakefield executive MD (South Asia) Sanjay Verma.

Many in the industry feel that notwithstanding the final verdict on the extent of global economic slowdown and recovery of financial institutions, real estate players in India may continue to face liquidity problems in the near future due to global credit crunch and unfavourable stock market conditions for raising capital.

What’s more, bankers say they may now get more cautious towards lending to real estate developers. “Real estate companies have many projects at hand and the sales have been constantly dwindling. Analysing these sentiments, any financial institution will be cautious. Remember, during monsoons, housing sales come down and banks may have to consider increasing interest rates further in future,” says HDFC Bank chairman Deepak Parekh. State Bank of India (SBI) is no different. It is also contemplating similar measures. “We are not sure for how long the current volatility will exist in the realty market. Also, banks need to maintain their reach among their clients. However, it is possible that all banks may sanction loans to only those developers with whom they have had a long relationship,” says a top SBI official.

Industry experts feel the only avenue available for raising capital in the current situation is at the project SPV level and by way of private equity or similar sources, which is generally the most expensive method of raising capital and has limitations on the over all extent of financing that is required. “Concerns about liquidity will continue to plague the market since debt will not be easily available. Real estate players had traditionally raised money from debt funds via corporate deposits and commercial paper. However, debt funds are currently not eager for more exposure in real estate and are continuously rolling over the debt advanced to these players. The primary source for institutional funding will, therefore, now be private equity,” says JLLM chairman & country head Anuj Puri.

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