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Wringing times for realty developers


Wringing times for realty developers

Last updated: April 25 2011
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  • Wringing times for realty developers

    The struggle by property developers to repay the debt load they’d taken in brighter times continues. Unlisted property developers are likely to have a problem, even as big listed ones are selling land parcels to meet repayment obligations for the financial year 2010-2011.

    For, while the listed developers such as Unitech, HDIL, Parsvnath, etc raised funds through equity via qualified institutional placement (QIP), unlisted companies which were planning initial public offers (IPOs) to finance their projects and deleverage their books are yet to float these, given the volatility in the markets. Over half-a-dozen real estate companies have got final approval from the market regulator to launch IPOs but are waiting for markets to improve. These include Raheja Universal, Lodha Developers, Lavasa Corporation and Kumar Urban Development. Together, they were looking to raise Rs 9,000 crore from markets.
    Lodha Developers, which borrowed Rs 1,640 crore from Deutsche Bank in 2007, repaid Rs 850 crore in December 2010 and has planned to repay around Rs 700 crore in three to six months. The draft prospectus it filed with the the Securities and Exchange Board of India (Sebi) shows it plans to use Rs 157 crore from IPO proceeds to repay or prepay debt in 2010-11.
    Emaar MGF is planning to raise Rs 1,600 crore through an IPO and is yet to get a Sebi nod for this. It plans to use Rs 614 crore from the IPO to repay or prepay debt. The Delhi-based developer needs to repay Rs 1,199 crore by March 2011.
    Cash flow pressure “With correction in stock prices, the ability of unlisted developers to raise funds, either through IPO or private equity, is affected. With increase in interest rates, both the demand for properties and home prices can come down, which may affect their cash flows. Hence, some unlisted developers might find it difficult to meet their repayment obligations,’’ said Vikas Agarwal, senior vice president, Icra, a rating firm.
    The BSE Realty Index, which tracks the movement in realty stocks, has fallen 30 per cent since the beginning of the current financial year, showing investor apathy in realty stocks.

    Home sales in Mumbai have dropped to half, compared to the beginning of 2010, as property prices in key areas have risen 40-45 per cent. Those in the National Capital Region are stable due to slow growth in prices, according to recent data from PropEquity, a realty research firm.

    An Emaar MGF spokesperson did not respond to a mail on the subject, while a Lodha executive said: “We have no issues with repayments. We are most comfortable on this front.’’
    But analysts do not see a rosy picture ahead. “Real estate companies planning IPOs in 2011 may experience a lack of enthusiasm on the part of investors due to the lending scams uncovered in India in Q4 of 2010. Any failure to raise funds through the equity markets would increase real estate companies’ dependence on banks and increase their vulnerability to RBI (Reserve Bank of India) action,’’ said analysts from international rating firm Fitch, in a recent report.

    “Nobody knows how much debt these unlisted firms have piled up or how much they need to pay in FY 2011. Barring Emaar MGF, nobody has filed a revised DRHP (draft prospectus) after September 30, 2010,’’ says an analyst from a Mumbai-based brokerage who did not want to be identified.
    Bank finance drying Public sector banks have already tightened lending to real estate firms and are asking for additional collateral and putting completion guarantee clauses for real estate developers in the aftermath of the bribe for loan scam. With the RBI asking banks to moderate credit growth, the flow to the real estate sector may be further tightened, say analysts.

    RBI has already ruled out another round of restructuring of real estate developers’ loans. Both listed and unlisted developers restructured loans worth Rs 10,000 crore in 2009, after RBI allowed banks to roll over the loans without treating these as non-performing assets (NPAs). Apart from this amount, developers need to repay Rs 15,000 crore this year.

    “Since RBI has refused further concessions, either developers have to pay their dues or get their loans classified as NPAs. But banks do not want NPAs and hence the pressure is on developers,’’ says Pranay Vakil, chairman of Knight Frank India, a global property consultant. “They (banks) will also review the advances given to developers in greater detail.’’

    Refinancing picks up With repayment schedules fast approaching, most developers are refinancing their old loans with new ones of longer tenures. DLF, the country’s largest developer, refinanced loans worth Rs 2,046 crore in the third quarter of 2010-11.

    Last year, HDIL, the country’s third largest developer, raised Rs 1,150 crore through non-convertible debentures to retire the high-cost debt it had taken from banks. It has raised a similar amount through qualified institutional placement (QIP) of shares.

    However, HDIL is a one-off case, as developers are raising debt at high rates, given the overall increase in interest rates. For instance, DLF’s cost of debt has gone up from 10.5 per cent in September 2010 to 10.8 per cent in December 2010. Smaller ones are seeing steeper increases.

    Omaxe, another Delhi-based developer, has seen a 1-1.5 per cent increase in cost of borrowing in the current financial year. Currently, its average cost is 14.3 per cent.

    “The weighted average cost of capital of banks has gone up by 200 basis points in the last one year. How can banks lend at lower rates?” says Shobhit Agarwal, joint managing director, capital markets, Jones Lang LaSalle, an international property consultant.

    Vakil says some unlisted developers are also borrowing at steep rates of above 20 per cent to meet their requirements. “These are the unsecured borrowing from HNIs. Anyone borrowing at these rates is sending a danger signal and showing severe pressure on them,’’ says Vakil.

    Realty companies are also borrowing funds from portfolio managers and private equity funds at high rates. In September last year, Kotak Realty Fund invested Rs 250 crore in two projects of Emaar MGF, by subscribing to non-covertible debentures. The NCDs carried a rate of 20 per cent. HDFC Venture funds invested Rs 500 crore in World One project of Lodha, by picking up 10 per cent stake in it.

    Land sales DLF, the country’s largest property developer, sold land parcels worth Rs 403 crore in Pune, Amritsar and New Gurgaon, in the third quarter. The company plans to continue such sales in other parts of the country. It repaid Rs 2,680 crore of loans in the third quarter out of Rs 2,890 crore it needed to pay during the quarter. It needs to repay Rs 2,700 crore in 2011-12. HDIL recently sold its Popular Car Bazaar land in Andheri to the Mumbai-based Kanakiya Group for Rs 800 crore and another land parcel in Goregaon for Rs 600 crore. It plans to use the proceeds to repay debt.

    “We have rental inflows of Rs 1,500 crore every year. Even if we do lease rental discounting for six years, we can mop up Rs 10,000 crore and we can repay half our debt. The balance Rs 3,000-4,0000 crore we can reduce by selling non-core assets, land parcels,’’ said a senior executive from DLF.

    HDIL is following a similar strategy. “We are looking at both residential sales and FSI (floor space index) sales to generate cash flows. We will take a call in our next board meeting on whether to use positive cash flows from FSI or residential sale to reduce our debt,” said Hari Prakash Pandey, vice-president (finance), HDIL, in a recent interview to this paper. HDIL has total debt of Rs 4,000 crore on its books and needs to repay Rs 150 crore by March 2011.

    But unlisted ones have a limited land bank and can’t raise much by such sales. “Large players have built their land bank over the years and even if they sell some non-contiguous land, it will not affect their project pipeline, but this is not the case with unlisted companies,’’ says an analyst from a Mumbai-based brokerage.
  • #2


    Re : Wringing times for realty developers

    Builders Seek PE Money For Old Land Payments, More Plots

    Real estate developers are depending heavily on private equity (PE) funds to bail them out to make payments for old land acquisitions and to kick off projects at the land-buying stage.
    With bank loans drying up and cash flows under stress due to dipping sales, PE money seems to be the only source of relief.

    Two Mumbai-based firms, DB Realty Ltd and Ackruti City Ltd, need to pay up a premium of Rs.802 crore and Rs.330 crore, respectively, in February for the redevelopment of the high-profile Bandra Government Colony project in the city that was allotted to them by the state government last year.

    The land premium that was to be paid in September 2010 was pushed to February this year according to a 28 January report by Anand Rathi Financial Services Ltd.

    Both the developers have said that they will need to raise money to make the payments.

    An Ackruti City spokesperson told Mint that the company would evaluate options including PE funds and debt to pay off the premium.

    DB Realty, in an analyst presentation, said that it wants to raise Rs.1,200 crore by diluting a 20% stake in the project.

    "With revenues falling, builders are increasingly finding it difficult to pay for land that they have already bought and are thereby deferring payments," said Gulam Zia, national director, research and capital advisory services, Knight Frank India, a property advisory. "For lack of funds, land transactions are also falling through or being put on hold across the board."

    Zia added that firms that have already committed to expensive land deals and have issued optimistic sale projections are in a bind, unable to renegotiate the agreements.
    Indiareit Fund Advisors Pvt. Ltd is evaluating investment opportunities on this front in Mumbai, Pune and Bangalore to deploy about Rs.250-300 crore.

    Ramesh Jogani, managing director and chief executive of Indiareit, said that the demand is on three counts--one, to pay off old land acquisition commitments, two, funding at the early, land stage of a project and three, to repay debt.

    "If it makes commercial sense to us, we would look at all of them," he said.

    Kotak Realty Fund's chief executive S. Sriniwasan said that if a PE fund asks for 18-22% equity return at the execution stage of a project, it goes up to 26% when a fund enters at the land stage.

    "There are a lot of enquiries on investing for land payment but these are high-risk propositions with a lot of uncertainty in terms of approvals in markets such as Mumbai," said Sriniwasan.

    Property analysts said that developers are willing to pay higher returns.

    "Funds are asking for as high as 30% guaranteed returns against such investments, almost as stringent as bank loans," said Amit Goenka, national director, capital transactions, Knight Frank India.

    Land sales, particularly in Mumbai and Delhi-National Capital Region (NCR) are drying up. The most recent example of a sale that got aborted is that of the 108-acre Bayer CropScience Ltd plot in Thane, near Mumbai, valued at over Rs.1,000 crore. While DB Realty was close to clinching the deal, it fell through because the price couldn't be agreed upon.

    Bangalore realty firms, which refrained from aggressive land purchases last year, are, however, preparing to build inventory and hence, are eyeing PE money.

    This year, Kotak invested about Rs.100 crore in Total Environment Building Systems Pvt. Ltd to buy a land parcel in south Bangalore.

    Century Real Estate Holdings Pvt. Ltd, another Bangalore property firm, wants to raise about Rs.700 crore from funds for early stage investments in projects. "We need pre-development funding so that the projects can be jumpstarted," said Ravindra Pai, managing director, Century Real Estate. "It is expensive money but there are many risks involved in markets such as Bangalore where you don't get clean land and acquisition is difficult."
    Last edited February 10 2011, 01:25 PM.
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    • #3


      Re : Wringing times for realty developers

      Realtors eye Rs 1,000 cr from PE funds

      Starved by banks who are going slow on loans to realtors and slowing sales of apartments, smaller real estate developers in western India are wooing private equity investors to raise as much as Rs 1,000 crore to invest in their new projects.

      Real estate developers such as Maharashtra-based Everest Developers, Puranik Builders, Sunjana Realtors and Omkar Realtors are planning to raise around Rs 300 crore each through private equity funds. “In March-April period, residential sales were down and cash flow of many developers has come down. Banks are also very cautious to lend to real estate players. Private equity players are showing interest since they will be able to get better deals,” Ravi Ahuja, director at Cushman and Wakefield, said.

      Puranik Builders’ plans to raise around Rs 300 crore by this year to fund its upcoming projects. “We will invest around Rs 500 crore this year for five new residential projects. We already have a land bank of 100 acres and need funds for construction,” said Shailesh Puranik, managing director of Puranik Builders. The company has 10 ongoing residential projects in Thane, Mumbai, Lonavala and Nashik.

      “Around 60 per cent of the funding will be done through PE while the rest 40 per cent will be done through debt,” said Puranik who is in discussions with real estate-focused funds. The exact stake that will be diluted in the special purpose vehicles used to construct the projects are in the process of being worked out.

      Everest Developers, which is constructing two large townships in Thane, too now plans to raise around $60 million (Rs 268.10 crore) by September 2011 from PE investors, for constructing residential apartments.

      “Every six months we construct two towers in the same outlay. We target to sell around 1,000 apartments every year. For the first time we plan to raise PE funds to bankroll this project,” said Nainesh K Shah, executive director at Everest Developers.

      Sunjana Realtors plans to construct an integrated township for which it will invest around Rs 300-500 crore. “We have already acquired the land and are waiting for approvals for starting construction. We will raise funds for the construction through private equity but have not yet decided on the quantum. Once we get all the approvals we will decide on it,” said Sandeep Karnavat, director at Sunjana Realtors.

      Omkar Developers that has already constructed nine projects on 2 million sq ft of land now plans to develop 12-15 million sq ft of land over the next three to four years. Deepak Mishra, head of sales and marketing at Omkar, said the company plans to offload minority stakes to private equity players for raising funds.

      Bankers in charge of real estate lending at public sector banks such as State Bank of India, however, say that getting PE funds will be an uphill task since PE funds are wary of the high level of prices and falling property sale registrations in major markets.

      Realtors eye Rs 1,000 cr from PE funds |


      Looks like hard times for Realtors . With banks, no longer bent on extending loans, Builders r looking at other means to keep their bandwagon rolling . Could add momentum to the slowly progressing bus of correction . Let's wait & watch .
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