Mumbai realty developers' debt rises

Land purchases and big projects, amid dull sales growth, among the reasons

New land acquisitions, big property projects and private equity buyouts are pushing up debt levels of Mumbai-based real estate companies.

Net debt of developers such as Oberoi Properties, which had remained debt-free for a long time, and of Godrej Properties, which followed a joint development model, has risen in the past three quarters due to negative cash flow.

According to Kotak Institutional Equities, Godrej Properties’ net debt rose from Rs 1,839 crore (Rs 18.39 billion) in this financial year’s first quarter to Rs 2,474 crore (Rs 24.74 billion) in Q2 and Rs 2,605 crore (Rs 26.05 billion) in Q3.

“Slow sales in residential and commercial property  in the older projects and high capital employed in commercial have consistently resulted in Godrej Properties reporting negative operating cash flow and, hence, rising debt,” said Samar Sarda, an analyst with Kotak Institutional Equities Research, in a recent note.

Sonam Udasi, head of research at Tata Asset Management, believes to develop marquee projects, GPL needs to take debt.

However, the company says its financials are strong.

“GPL's sales volumes in the first nine months of FY15 are up 97 per cent and are the second highest among all publicly listed real estate developers in India.

“Our balance sheet is strong and our borrowing costs are the lowest in the industry,” said Pirojsha Godrej, chief executive and managing director, in an emailed response.

According to the Kotak report, Oberoi Realty’s net debt rose from Rs 555.9 crore (Rs 5.55 billion) in Q1 to Rs 690 crore (Rs 6.9 billion) in Q2 and Rs 792 crore (Rs 7.92 billion) in Q3.

It had negative cash flow from operations in 2013-14 and in the first nine months of 2014-15, Sarda expects high expenditure in the Oasis joint venture in Worli without sales being a key reason for this.

The Oasis JV is for developing a mixed-use project, including the Ritz Carlton Hotel and Residences, managed by Ritz Carlton.

Udasi believes with a low debt to equity ratio and strong market capitalisation, it can easily manage the debt.

Oberoi is gearing for a slew of launches.

These include a housing project in Mulund West and Borivali East, and the Oasis JV in Worli.

Early last year, it bought Tata Steel’s land in Borivali for Rs 1,150 crore (Rs 11.5 billion) and raised debt to fund the acquisition.

The debt levels at another company, Indiabulls Real Estate, primarily went up due to new acquisitions, which included 22, Hanover Square, in London, where the cash outflow was Rs 1,800 crore (Rs 18 billion), and Voltas’ land in Thane, where it paid Rs 240 crore (Rs 2.4 billion).

Indiabulls believes the purchases will yield a good surplus.

“We strongly believe these investments add significant development potential to the company and are likely to contribute a Rs 2,000-2,500-crore (Rs 20-25-billion) net surplus over the next five years.

Further, the foray into London diversifies our footprint into a liquid/transparent market and further improves the predictability of our delivery, through the macro business cycles in India,” said a spokesman.

Overall, listed Mumbai developers are battling higher inventory levels.

They have unsold under-construction area worth Rs 53,400 crore (Rs 534 billion), a Kotak report said, adding developers have Rs 36,800 crore (Rs 368 billion) in coming launches, almost half of these from south-central Mumbai.

Developers are not able to sell assets faster and cash flow improvement is not happening as the real estate sector is yet to recover, said Udasi of Tata Asset Management.

“To fulfill existing projects, they have to take debt,” he said.