Currently around 68% of flats in Mumbai cost more than Rs1 crore while 95,000 flats have remained unsold which may take three years get absorbed. While the bad debts are increasing there are new funding avenues opening for realtors 

The growing concern over bad loans, in addition to Moody’s downgrading of the State Bank of India (SBI) has painted a grim picture of the economy, especially banking sector. One of the major sectors causing the bad debts is real estate. However, despite incurring huge debts, realtors so far have refused to reduce prices thus alienating buyers.

According to Reserve Bank of India, Indian developers held a total of $24.4 billion (about Rs1.22 lakh crore) of outstanding credit at the end of June 201 an increase of 23% from last year. DLF, India’s biggest realtor, saw almost Rs1,000 crore increase in its debt during the July-September quarter. Currently, the company has a debt of Rs22,519 crore. Mumbai-based realtor HDIL has incurred a debt of Rs4,000 crore as of September end.

However, realty prices continue to be high, and hence sales are suffering. Pankaj Kapoor, managing director, Liases Foras said, “About 95,000 flats remain unsold in Mumbai, which amounts to some 110 million sq ft of area. It will take 36 months to absorb this inventory.”

A recent study by Liases Foras revealed that at present around 68% of flats in Mumbai cost more than Rs1 crore. Homes that are ‘affordably’ priced between Rs25 lakh to Rs50 lakh, are usually located at distant places and are in filthy and unliveable conditions.

With no sales, banks are seeing a rise in number of non-performing assets (NPAs).  LIC Housing Finance reported a gross NPAs at 0.64% (Rs359 crore) as on 30 September 2011 against 0.74% (Rs320 crore) same period a year ago. The company’s net NPAs were 0.12% to Rs66 crore as against 0.24% (Rs102 crore) for the corresponding period.

A sector analyst with a leading brokerage house said, “If there are no sales (especially in metros like Mumbai and Delhi), there are chances that more houses will remain unsold. Non-performing assets can then increase in numbers.”

Mr Kapoor said that many new launches have seen lower prices, but prices of the unsold inventory continue to be high. “Builders will only reduce prices if other sources of money dry up,” he said.

However, realtors may have another good option opening up to them. Recent media reports hinted at government reversing its decision to re-classify private equity with built-in options as foreign debts.

A Macquarie report says, “In early October, the foreign investment policy update had introduced an innocuous clause that says ‘Only equity shares, fully, compulsorily and mandatorily convertible debentures/ preference shares, with no in-built options of any type, would qualify as eligible instruments for FDI.

Equity instruments having in-built options or supported by options sold by third parties would lose their equity character and would have to comply with ECB guidelines”. In other words, now builders may find it easier to get private equity funding.

Some experts believe that allowing builders to extend the term for loan repayment has also created problems. “If loans to realtors are not allowed to be extended beyond a point, they will be forced to sell,” said the analyst.