Credit flow to real estate eases

Real estate developers, who were battling tight liquidity in the past few quarters, are breathing easier with banks now more inclined to lend.

Developers such as DLF, Unitech and Orbit are in the process of raising around Rs 5,000 crore (Rs 50 billion)  in the current fiscal after they rolled over nearly Rs 9,000 crore (Rs 90 billion) debt subsequent to the Reserve Bank of India (RBI) allowing banks to restructure loans to developers.

"The situation is getting better with financial institutions restructuring our loans and looking into proposals for project execution. Even home buyers are coming in, depending on price, interest rates and locality," said Pradeep Jain, chairman of Parsvnath Developers, which is looking at repaying Rs 400 crore (Rs 4 billion) debt in the next couple of months. However, said Jain, banks were charging 50-75 basis points more as interest while rolling over the debt.

Parsvnath rolled over Rs 800 crore (Rs 8 billion) debt last year from banks and financial institutions. Orbit rolled over Rs 190 crore (Rs 1.9 billion) debt in March 2009 for the next three years.

According to RBI data, loans to the real estate sector grew 61 per cent on a year-on-year basis, with Rs 90,765 crore (Rs 907.65 billion) outstanding as on February 27, 2009.

"Though the first half of 2009 was tough, debt is available for developers in metros now. The situation has improved from March. Our average borrowing rates are down from 14.5 per cent a year ago to 13-13.5 per cent now," said Ramashraya Yadav, head of finance at Orbit Corporation, a Mumbai-based developer which is in the final stages of tying up Rs 140 crore (Rs 1.4 billion) debt to fund its projects.

Property developers had to borrow at hefty rates last year as banks shied away from lending after defaults from the sector went up and property valuations dropped. In addition, the central bank increased the risk weightage on loans to commercial real estate.

Developers had to sell their assets to reduce the mounting debt. While DLF is looking at raising Rs 5,500 crore (Rs 55 billion) through sale of hotels and its power unit, Unitech, another New Delhi-based company, has sold its Gurgaon hotel and stake in its telecom arm, Unitech Wireless, to raise funds.

Apart from enhanced bank funds, real estate developers are witnessing a revival in interest from overseas investors. The recent rally in stock markets and the success of Unitech's $325 million (Rs 1,625 crore) qualified institutional placement (QIP) is encouraging developers to raise funds through the route. Indiabulls Real Estate is in talks with investors to raise at least $150 million from sale of shares to overseas investors.

According to S Subramanian, head of Investment Banking at Enam Securities, nearly $1 billion (Rs 5,000 crore) of institutional money is expected to be invested in Indian equities in the next six months, of which $500 million (Rs 2,500 crore) is expected to flow into realty stocks.

Developers expect liquidity to ease further once the general election results are announced and a there is clarity on who forms the next government.

"Banks and mutual funds have enough money with them. As the new government comes and the uncertainty on this front ends, credit availability will improve," said JC Sharma, managing director of Bangalore-based Sobha Developers.

Still, consultants say developers may continue to face an uphill task for some more time before they can consider themselves out of the woods. Business consultancy KPMG's Executive Director, Jai Mavani, believes banks are also asking developers to create liquidity within 16 to 18 months while restructuring their loans.

"If one is looking at increased liquidity as a sign of revival of the property market, that might not be the case as home buyers are opting for only those properties which are 35 to 40 per cent cheaper than the market price. Demand is lacklustre in the higher price segment," he said.

On the equity market front also, developers are looking bullish. Mumbai-based Indiabulls Real Estate (IBREL) is in the market to raise $150 million as part of its plans to raise $600 mn to fund its power projects. Sobha is planning to raise $150 mn (Rs 750 crore) from equity markets.

"We have kept all our options open and will take a call at the right time," said Sharma of Sobha Developers.