Constant rate hikes have further burdened realty industry (Comment)

August 3rd, 2011 - 1:13 pm ICT by IANS  

It is a matter of concern that credit growth, both for home loans and on the exposure to real estate developers, has hit a speed breaker due to repeated interest rate hikes. Industry statistics show the growth rate of loans to developers came down from 43 percent in January to just 11 percent in May this year.

Similarly, home loan growth has also dropped significantly during the same period. And the Reserve Bank of India’s latest directive to banks to adopt strict lending norms, especially with regard to loan documents, may well further tighten the liquidity environment.

What is further adding to the woes of real estate companies is the overhanging debt. In 2010-11, the cumulative debt of leading listed companies like DLF, Unitech, HDIL, Sobha and Godrej topped Rs.34,000 crore. And despite availing corporate debt restructuring, many real estate companies are not able to significantly reduce their debt.

Apart from scarce bank credit, sluggish stock market has further restricted the real estate developers’ options to raise funds. About a dozen developers’ plan to raise money through initial public offerings has got stuck as they do not want to incur the risk of low valuations and lukewarm response. The investors’ appetite for public issues is simply not there.

At the same time, now that stock market is not doing well, people are wary of investing money into real estate. Even the profit-hungry high net worth individuals are turning to specialised options such as offshore funds, which do well in terms of returns even when there is a market slowdown.

In this backdrop, fund-starved real estate companies — finding customer advances insufficient to carry out their construction activity — are now increasingly depending on private equity players and non-banking finance companies, even if the funding is sourced through receivable financing route. Their desperation level can also be judged from the fact that a few smaller real estate companies are borrowing money from the market at a rate as high as 24 percent.

With customer advances shrinking in view of slow home sales due to the high property prices and increasing loan rates, debt-ridden developers are resorting to selling their land assets for raising money to complete their projects. An industry study indicates that in view of increased project delivery commitments and cost escalation in construction, 480,000 residential units are likely to face delays in execution during the period of 2011-13.

A number of developers, especially in the National Capital Region and Mumbai, are resorting to unhealthy practice of underwriting. They are selling a substantial part of their inventory to financiers and speculators on assured return basis, at the pre-launch stage. Later, the launch price is hiked to give investors their promised margin. It is to safeguard the interest of these investors that developers do not offer price cuts and instead hold on to properties despite slowdown in sales, thereby inviting the risk of speculative bubble.

It is not just the working capital crunch that is unnerving the real estate developers. The construction-cost inflation, coupled with rising interest costs have badly impacted the profit margins of real estate firms. The cost of debt from banks has gone up by 2-2.5 percent and from non-banking sources by about 6 percent in a year.

As business sentiment dips amid worsening macro-economic scenario, coupled with persistent inflation and mounting finance costs, cautious optimism is giving way to concern. It is now really a worrying fact that consumption growth has moderated due to constantly rising inflation and high interest rates.

The government’s policy of taming inflation by increasing rates at regular intervals has not worked. In fact, this has resulted in choking real estate supply and curbing demand. There is a need for a pragmatic policy that desists from continuous increase in interest rates and instead works towards boosting supply and consumption.

(Vinod Behl is editor of Realty Plus monthly. He can be reached at vbehl2008@gmail.com)

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