Bloomberg
The real estate industry is expected to face “large-scale distress” amid rising borrowing costs and shrinking access to credit that may force developers into fire sales for assets, according to Knight Frank LLP.
Developers will have to repay Rs 1.8 lakh crore ($40.8 billion) of debt to state-run banks, private equity funds and other lenders over the next two to three years, said Amit Goenka, national director of capital transactions at the Indian unit of Knight Frank. Their cash flow may also be under pressure as creditors seek earlier repayments, he said.
“I see large-scale distress coming up,” Goenka said in an interview on Thursday. “Right now it’s more of financial jugglery which is keeping builders alive for a few months before everything starts to cave in.”
Small privately held developers may go “belly up” and the industry will see large-scale mergers and acquisitions and more distressed sales, Goenka said. The central bank’s interest rate increase this year to curb inflation has led to tighter liquidity and higher borrowing costs for developers. The Reserve Bank of India last month raised the repurchase rate to 6.75% from 6.5% and boosted the reverse repurchase rate by 25 basis points to 5.75%.
Many property companies raised capital at interest rates of between 21% and 25% from finance companies, while sales volumes dropped by about 50%, Sanjay Dutt, CEO of business at the Indian unit of Chicago- based Jones Lang LaSalle, said last month.
Home inventory levels have climbed to 28 months in Mumbai, the highest among the six cities tracked by Liases Foras, a real estate research company whose clients include Housing Development Finance Corp, India’s largest mortgage lender.
Developers who had access to cheap capital after the 2008 credit crisis are now facing a cash crunch as the equity fund raising route has been shunned by investors. Banks have also cut lending amid a bribery probe in November and the central bank has tightened provisioning rules.
Real estate debt outstanding with state-run banks is about Rs 1.6 lakh crore while those at private equity funds stand at almost Rs 1 crore, Goenka estimates. Private lenders are owed about Rs 0.4 crore, he said.
“It’s clearly a debt trap, the story has turned and will only get more dramatic this year,” Goenka said. “I do see shades of the 2008 crisis playing out with some failures in the industry.”
Mumbai, the country’s most expensive real estate market, had a record number of unsold housing units, Goenka said. Still, he doesn’t expect developers to slash prices.
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