Falling sales to affect refinancing of realty sector: Ind-Ra report
Given that the real estate sector has mainly relied on refinancing to meet debt servicing obligations, owing to the negative cash flows, it is unlikely to witness a revival in sales in FY18 and R
Given that the real estate sector has mainly relied on refinancing to meet debt servicing obligations, owing to the negative cash flows, it is unlikely to witness a revival in sales in FY18 and refinancing will increasingly become difficult, says a report by India Ratings and Research. “Such refinancing has provided a cushion for developers, to hold prices despite slowing sales and the high prices will further delay a recovery in sales and cash flows,” the rating agency said in a statement.
Realty players have been less reliant on bank credit and the growth in banking credit to the commercial real estate sector slowed down in FY17, with a growth of a mere 0.4% since the start of FY17 till January 20, it said. Also, significant interest had been observed from non-banking finance companies and private equity investors, for refinancing debt in the last three years. “Finances of real estate developers continue to remain stretched, due to elevated inventory and debt. It is estimated that debt levels will further rise, given the negative operating cash flows,” the agency said.
It noted that the Indian realty market is currently grappling with a double whammy of the cash shortage caused by the impact of demonetisation and the imminent introduction of the Real Estate Regulator (RERA). “This, along with the increasing refinancing risk, would shake up the sector, with developers with high leverage losing out. The sector also needs to undergo a structural change in the way it does business and move towards a model, where projects are completed before sale. Such a structure would favour real estate companies having better access to funding,” it said.
The agency further pointed out that larger players with access to multiple funding sources, such as NBFCs, PE funds and FDI, in addition to banks, are likely to have an advantage. “This could lead to consolidation, which may be in the form of land sales or joint development of land, with larger, organised and well-funded developers. This will usher in a new phase for the sector, which is overcrowded with plenty of players with weak financials. We are likely to witness a series of joint developments and joint ventures between landowners and financially weak small developers with bigger, better-funded, better-organised players or weaker developers getting taken over by well-funded larger players and struggling developers cashing in their land banks by selling them to players with stronger balance sheets and appetite for growth,” the report stated.