Realty firms on shaky ground

Was the real estate euphoria just a bubble waiting to burst? The current financial year will reveal the answer.

Access to capital is the main challenge facing real estate developers today. Most of the developers rely significantly on the money made from pre-launches for financing the project construction.

As the home loans have become more expensive and a price correction seems imminent, consumer interest has faded. This has a direct impact on a builder's ability to develop a project.

Raising debt from banks at today's costs has become unviable. The banks have raised their lending rates to developers to 13-15 per cent from 9-11 per cent three months ago. Banks had earlier stopped funding the acquisition of land last year and have now been cautioned by the Reserve Bank of India to reduce their exposure to real estate.

Another option for raising money is the capital markets. But the realty companies are having problems on the bourses as well. Their market cap has reduced by more than 20 per cent since the beginning of the calendar year. An analyst with Motilal Oswal said only the large cap stocks (more than Rs 1,000-2,000 crore) had a bright future. "Investors will have faith in only the big players such as Unitech. This is because the ability to execute projects on time will impact an investor who buys and holds on to realty stocks. The large cap companies can structure their funds and usually have a better track record," the analyst said.

Globally, Real Estate Investment Trusts play a vital role in financing real estate. "The government spoke of real estate mutual funds and REITs last year. But we are not expecting any positive move in this direction. The year will be dominated by elections," said Sanjay Chandra, managing director, Unitech.

However there is one major difference between today and the property crash of the 1990s. "The option to private equity was not available last time. Funds have raised $9 billion and are just waiting to deploy that money. And it is private equity that is chasing companies, not the other way round," said Chandra.

"Fly-by-night operators will not survive. There will be a weeding-out process. The bigger developers will buy out land and projects of small builders at attractive valuations," said Arvind Parakh, CEO, Omaxe.

The smaller developers are putting their expansion on hold and concentrating on consolidating assets. One such developer from Delhi said, "Most builders will not buy land for the next six months to one year. Financing is too uncertain now. There is no demand and therefore there is no sense in planning new projects right now."

"The future lies in strategic partnerships between bigger firms and smaller, regional players. Smaller firms could also become "land traders" for the bigger firms. Obviously it is the small but clean firms that will strike such partnerships," said an industry expert.