Real Estate Companies asked to Repay Loans via QIP Funds

June 3, 2009	(1 votes, average: 5 out of 5)  Loading ...
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Real estate companies, which are raising money from institutional investors, are being told to use the funds to repay loans first, instead of taking up new projects, people familiar with the development said. The warning comes, as real estate firms saddled with thousands of crores of rupees in debt struggle to generate cash from the sale of properties, while they raise money from the qualified institutional placement (QIP) of securities.One of those who got this message last week is a real estate company, which is in talks with a foreign institutional investor for QIP funding. “Post the Lehman crisis, many companies, including ours, had postponed new projects, as demand had slowed and liquidity, too, wasn’t forthcoming. But the investor insisted clearly that debt reduction should be a priority now,” said an executive with realty company.

The foreign institutional investor is backed by a UK-based bank and has invested in a number of QIPs. A large Delhi-based real estate company also faced a similar situation with the same institutional investor, it is learnt. The two companies, which figure among the top five real estate enterprises in India, have a total debt of about Rs 15,000 crore. Realty companies, which were the worst affected by the liquidity crisis, have been among the first to tap the QIP route to raise funds. Recently, Unitech and Indiabulls raised around $325 million and $550 million, respectively, through the QIP route. Other companies, such as HDIL, Parsvnath, Puravankara, Sobha Developers, HCC and GMR, said they will follow suit.

DLF’s promoters recently sold 9.9% of their shareholding in the open market. According to industry executives, the insistence on using money to retired debt first could become a trend among qualified institutional buyers, including foreign institutional investors, banks, insurance firms and mutual funds. In the past month, more than 20 companies have passed enabling resolutions to raise about Rs 30,000 crore through the QIP route, mainly to take advantage of the renewed interest shown by funds, which were sitting on the sidelines during the liquidity crisis.

A senior executive with a bank explained that the development is part of stricter due diligence norms. “Several real estate players have heavy debt and despite that these firms are planning to venture into new projects,” he said. “We wanted to convey the message that we, as investors, would prefer them to first repay debt,” he added. A senior official with a Mumbai-based mutual fund said real estate companies are using some of the funds raised through QIPs to repay debt and part of it to manage cash flows and business expenses. DLF group executive director Rajeev Talwar said the real estate developer’s priority would be to repay debt. “The (industry) situation has improved and firms are able to raise liquidity, but debt reduction is a priority,” he added.

According to industry executives, real estate companies also have other liabilities. A top real estate firm bought a large parcel of land near Bangalore by just paying token money in a bid to rope in foreign investment last year. “The remaining portion was never paid and now the company has been asked to make the full payment,” said one person, who is familiar with the development. Anuj Puri, managing country head of real estate consultancy Jones Lang LaSalle Meghraj, said it is “wrong if someone is not addressing debt and planning new investments”. “Though the market looks good now and even land prices are attractive, firms should first repay debt.”

News Published Under:   Real Estate India, Real Estate Developers |

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