Realty Grim as Cash Cracks begin to Show

April 9, 2008	(Be the first to rate this story!)  Loading ...
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INDIA’S booming real estate story is finally showing signs of disquiet, in a throwback to the scary 1990s when the inter-corporate deposit (ICD) market’s high interest rates saw companies borrowing at huge costs to tide over a cash crunch. Then, these desperate borrowers often ended up losing their businesses to bigger players and loan sharks.

In what could be the onset of turmoil, real estate developers, particularly less credit-worthy ones, are today borrowing at 19-20% from big finance companies to stay afloat.

Only a week ago, a large property company (which recently withdrew its IPO due to adverse market conditions) was forced to roll over its short term borrowing from mutual funds—a telltale sign of the cash flow strain that some of its peers are grappling with. As banks have shut doors, small and medium builders are approaching aggressive non-banking finance companies and mutual funds who subscribe to the bonds issued by property firms.

Fund houses, incidentally, have quietly rolled over the debt, fearing that news of a default could affect their schemes’ returns and hence scare away investors. Builders who had managed to raise cheap money in the booming IPO market and those with land banks created at lower rates are in better shape. But those who had paid a part of the cost for expensive plots—hoping to make the balance payment with the IPO or private placement money—are stuck.

And small builders who are turned away by MFs and finance companies are borrowing at even higher rates from diamond traders and HNIs. The cost of such money is at an usurious level of 2% a month. Besides, they are mortgaging their properties at 60-65% of the current valuation to raise money.

“There are three category of lenders: private NBFC, financial institutions which qualify as NBFCs and a few subsidiaries of foreign banks and securities houses. As long prices stay high, the party can go on. But it will be impossible for the bubble to sustain for a long time. While pure FDI is coming in specific projects, structured deals with leveraged foreign funds have come down after the sub prime crisis,” said a real estate fund manager.

But the fear is that many companies have already walked into a debt trap with prices beginning to correct in most big property markets except Mumbai. “If the markets do not witness a substantial rise in demand and price in the next six months, these companies will either go bankrupt or be forced to sell out,” said a banker.

Property players also mop up funds by securitizing their receivables. In such financing structures, bonds (better called pass-through certificates) are sold on the back of the fund flow they anticipate from property sale. If deals slow down or property prices drop, servicing these bonds will be difficult. “However, property prices have to really crash for this to happen. Securitizations are done with margins to cushion the blow,” said a fund manager.

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

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