The realty reality; A CRISIL analysis of top 25 realtors

A CRISIL analysis of India’s top 25 realtors, accounting for 95% of the market capitalisation of India’s real estate sector, shows as much as Rs 30,000 crore of debt obligations will face high refinancing risk with demand in their respective markets expected to be tepid over the medium term. The past two years have seen realtors refinancing principal and interest obligations, some by leveraging the cushion available in their operational commercial portfolio. Add to that theproblem of construction cost outpacing customer advances lately, and developers seem to be caught in a debt spiral. As a result, these developers, which account for half of total bank lending to the real estate sector, have been forced to focus on completing ongoing projects – just to ensure that all monies due from buyers flow in. Demand slowdown has been such that saleability in some markets has fallen by two-thirds in the last three years, leading to poor cash collection even as construction cost increased. This has set off a vicious debt cycle that has forced realtors to bank on expensive alternative sources of finance to meet the funding gap.With sales flagging, half of the debt these realtors took to build residential projects faces high refinancing risk today. Debt taken to build homes had surged 25% to Rs 61,500 crore in fiscal 2015. CRISIL’s calculations show just to improve their financial position, high-risk developers will need a 66% growth in sales. The funding gap is expected to remain high in the current fiscal, too, which means the attendant risks remain. Compounding matters is the traditional lender – banks – shying away, which has increased the dependence of realtors on costlier external sources of finance. The net exposure of banks to the real estate sector declined by 100 basis points in the first half of the current fiscal.In the past, bank loans have met ~90% of the requirements of these 25 developers. However, going forward, incremental bank funding is expected to decline by ~5%, in line with their falling sectoral exposure. Realtors are expected to meet the shortfall through alternative sources such as non-convertible debentures and private equity. CRISIL believes demand recovery and deleveraging are the sustainable solutions for the sector. As for demand for new homes, we see it growing, albeit at a fairly subdued pace, riding on macro-economic improvement. Inventory overhang will continue and at 58 months, NCR is clearly a matter of concern and we don’t expect that market to recover anytime soon. Inventory in the west is at 48 months and in the south at 22 months. Average capital values in India’s top six cities – the Mumbai Metropolitan Region, the National Capital Region, Chennai, Bengaluru, Pune and Hyderabad -- are above their peak levels excepting for Hyderabad, so there is unlikely to be a significant appreciation in prices in the next 2 years. And current prices could find support if realtors manage to get funding on time. The implementation of Real Estate (Regulation and Development) Bill will herald transparency and discipline in the sector, and help revive investor and consumer confidence. And the relaxation of foreign direct investment norms is expected to facilitate flow of private equity investments to financially stressed developers and even to small-sized, standalone projectsDisclaimer: CRISIL has taken due care and caution in preparing this Press Release. Information has been obtained by CRISIL from sources which it considers reliable. However, CRISIL does not guarantee the accuracy, adequacy or completeness of information on which this Press Release is based and is not responsible for any errors or omissions or for the results obtained from the use of this Press Release. CRISIL, especially states that it has no financial liability whatsoever to the subscribers/ users/ transmitters/ distributors of this Press Release.

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