How are property developers dealing with the debt burden?

Developers who piled on debt during the boom years in the early part of the decade are struggling to shake them off in a depressed housing market with a record number of unsold homes.

Top builders are selling assets, refinancing loans, raising fresh capital, speeding deliveries to improve collections, selling development rights and entering development partnerships to keep the wolf from the door.

Not always with much success. Despite selling several assets and exiting wind power and hotel businesses in the last few years, net debt at DLF Ltd, India’s largest developer by market value, has only risen from Rs.20,965 crore in 2014-15 to Rs.22,202 crore in 2015-16. Out of this, about Rs.14,200 crore is on account of the rental business, and the rest from the residential development business.

A stagnant housing market that has affected all builders, hasn’t spared DLF either. This year, operating cash flow is expected to remain the same as the previous year. With the company spending about Rs.200 crore on construction every month, the cash flow is likely to be inadequate to pay interest on its loans, just like last year. With no new launches planned, it expects sales for this year to remain subdued at Rs.3,000-3,500 crore.

DLF now plans to raise about Rs.12,000 crore from financial institutions by selling 40% of its stake in DLF CyberCity Developers Ltd, its commercial property unit. Promoters plan to plough this back into DLF and raise more equity, as it aims to make DevCo, its residential property unit, debt-free. Saurabh Chawla, senior executive director-finance at DLF, told analysts recently that the deal is expected to bring down residential debt significantly.

Real estate being a capital-intensive sector, its debt levels tend to remain a little high. However, the bigger problem is the absence of buyers, especially for a company like DLF that is heavily focused on the National Capital Region (NCR) where the residential market is nowhere near recovery.

Debt at Unitech Ltd, another Delhi-based builder which was once India’s second most valuable property firm, amounts to Rs.7,165 crore. It recorded a loss of Rs.902.69 crore in 2015-16 on sales of Rs.2,007.54 crore. The company’s plan to sell land has not taken off and it has struggled to revive stalled projects. Last year, it said it would raise about Rs.1,400 crore to speed up construction and overcome liquidity crunch and delivery delays.

Sanjay Chandra, managing director, Unitech, though, sounded upbeat after announcing the company’s March quarter results. “Balance expected receipts from (these) ongoing projects combined are sufficient not only to meet the remaining construction expense but to also to service the debt, if any, against these projects. Apart from improving collections, company is also mobilizing funds from banks and financial institutions,” he said. Unitech didn’t respond to queries.

Leverage levels in real estate are not going down anytime soon, property analysts said. Developers need to raise more debt to overcome cash flow needs and need to construct and deliver projects as buyers demand timely delivery, they said.

“Debt is going to be the mainstay of developers trying to run their business on schedule. Since operating cash flows remain weak, they are dependant on external financing to ease out stress,” said Shashank Jain, partner, transaction services, PricewaterhouseCoopers India.

According to Jain, many builders are trying to refinance loans, but these are only interim measures. According to Jain, market sentiment needs to improve and there must be “on-ground action” so investors become confident enough to start buying again.

In May, Moody’s Investors Service downgraded the corporate family rating of Mumbai-based Lodha Developers Pvt. Ltd, India’s largest unlisted developer, as well as the senior unsecured debt rating of the $200 million dollar-denominated bonds issued by Lodha Developers International Ltd. The downgrade of Lodha Developers, which has about Rs.13,000 crore debt, signifies that its debt obligations are now estimated to carry ‘high credit risk’ from ‘substantial credit risk’ earlier.

“Lodha has the highest cash flow among all real estate companies in India with collection of over Rs.6,200 crore in 2015-16. Our land bank was valued at over $11 billion by Knight Frank in 2014. Our debt is in line with our business cash flows and asset base. Our debt repayments over next 12 months are already covered by our cash-in-hand and undrawn credit lines,” said Jayant Mehrotra, chief financial officer, Lodha Group.

“We are also in the process of evaluating a couple of significant private equity transactions, which will provide further impetus to our growth plans. In the present FY, our collections are expected to go up to over Rs.8,000 crore and we expect our sales to also be around Rs.8,000 crore,” Mehrotra said in an emailed response.

In May, Lodha raised Rs.425 crore of structured debt from Piramal Fund Management Pvt. Ltd for a new premium residential project.

Adversity has pushed many developers in the last three years to streamline their business strategies, holding back rapid expansion and instead focusing on critical issues such as debt reduction and delivery of projects to win back customer confidence.

Mumbai-based Housing Development and Infrastructure Ltd (HDIL) has cut debt from Rs.3,231 crore in 2014-15 to Rs.2,730 crore in 2015-16. The developer plans to further reduce debt through a couple of transactions by selling additional floor space index (FSI) in its projects to other developers.

“Issuance of warrants to promoters (for Rs.150 crore) will also help in further reducing debt,” Hariprakash Pande, senior vice-president, finance, HDIL, said in an analyst call on 28 May.

Similarly, Bengaluru-based Century Real Estate Holdings Pvt. Ltd, whose interest payments have got delayed in the past, now plans to reduce its debt of Rs.500 crore by selling a couple of ready office assets as well as land parcels.

“We have tried to repay expensive NCDs (non-convertible debentures) and replace them with construction finance as far as possible,” said managing director Ravindra Pai.

Prestige Estates Projects Ltd (PEPL), another Bengaluru developer, which has Rs.5,500 crore in debt, aims to repay debt from the cash flows from its yielding assets. Prestige has a large portfolio of office and retail assets generating nearly Rs.700 crore of rental income annually. “This will be used to repay debt or in under-construction rental projects,” said Venkat K. Narayan, executive director-finance and chief financial officer.

The need of the hour, however, is equity—patient capital that will give developers breathing time till buyers return. However, only a few private equity funds are willing to put up equity capital to builders.

“With debt ballooning, developers want equity. We have started doing preferred equity transactions, where we don’t charge interest or principal repayment for the first two years, giving developers some breathing time. This is only for Tier I developers but it’s flexible financing where the repayment schedule is based on our assumption on the cash flow generation of a developer,” said Khushru Jijina, managing director, Piramal Fund Management, which has a loan book and equity investments worth Rs.22,000 crore in the residential space alone.

Debt instruments continue to dominate investments in real estate. For instance, in February, Piramal Fund Management said it will provide a line of credit and pre-sanction Rs.15,000 crore funding limit to back about 8-10 developers in Mumbai, Bengaluru, National Capital Region, Pune and Chennai through a new scheme called Piramal Preferred Partners.


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