As sales fall, realtors look for new fund sourceJuly 14th, 2008 - 1:47 pm ICT by IANS
By Anuradha Shukla
New Delhi, July 14 (IANS) A stagnant property market, tightening of lending by banks and failure to raise money through public equities are forcing real estate developers to look for alternative options to raise money. India’s benchmark Realty Index lost more than half its value this year. With the heat being turned on, realtors of all sizes are pursuing different finance routes. Big players are looking at private equity funds to complete pending projects, while small developers are turning to the larger construction companies to sell theirs.
“This is really a tough time for the realty industry,” Naveen Raheja, chairman of the Delhi-based Raheja Developers told IANS. “On the one hand developers are hit by a cash crunch and, on the other, sales are dropping.”
According to property consultant firm KnightFrank India, despite huge demand, the volume of commercial property sales has dropped 30 percent and home sales by 60-80 percent in the past two months following rising interest rates.
And the worst hit are the small developers who have acquired land at exorbitant prices and now have no funds.
“Small developers are under pressure now. Selling incomplete projects to big developers is the only viable option for many of them,” said a senior official with KnightFrank India.
Bigger real estate firms such as Parsvnath, Raheja, Omaxe, Shobha Developers and Hiranandani have received many such offers from smaller developers.
“With sales dropping and property prices going for major correction, the venture has become less profitable,” Parsvnath Developers chairman Pradeep Jain told IANS.
“So those who joined the realty bandwagon expecting big returns are now opting out”, he added. “Many small developers have approached us.”
Adds Raheja, whose company has received such offers, “But we are not in a hurry. We are treading carefully and taking only those projects that we can complete on time”, he said.
A small developer preferring anonymity, as he wanted to protect his project, admitted his source of funds has dried up.
“Selling our projects to big players is the only option but they are becoming very choosy even when we are offering discounts as high as 30 percent,” he said.
But the bigger developers face an equal shortage of funds. They have now begun raising funds through inter-corporate deposits (ICDs) and non-convertible debentures (NCDs) on interest rates in excess of 18 percent to meet their fund requirements.
The vice president of a large real estate firm said his firm too has taken loans on high interest rates as protecting the brand name was more important than profits at the moment.
But the situation could worsen should the Reserve Bank of India (RBI) announce a further hike in repo rate - the interest rate on which the central bank lends to commercial banks - following the unabated rise in inflation, now at a 13-year high of 11.89 percent.
This will further increase the already high ICD and NCD interest rates.
According to Anuj Puri, chairman and country head, Jones Lang LaSalle Meghraj, private equity investment in the real estate sector may go up as much as 15-20 percent in the current fiscal to over $13 billion because of the funds crunch.
“One sector’s crisis is an opportunity for the other. Private equity players are grabbing the opportunity with both hands. However, they are opting for only big projects that offer an assured return of 20-25 percent on their investments,” Puri said.
A senior official from Unitech Developers, which has agreed to sell 50 percent stake in the first phase of a Mumbai project, said private equity investors are not just bargaining on a reduced valuation but are also putting various clauses.
“This is adding to our woes,” he said.
(Anuradha Shukla can be contacted at firstname.lastname@example.org)
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