Total income of top-90 developers, including their rental income from different properties is Rs23,564 crore but they need to repay a debt of is Rs45,128 crore. Due to the gross mismatch it seems current debt levels are not serviceable and developers will have to double their sales, says a research note from Liases Foras.
The independent real estate research institute says, "...the situation of developers is akin to an elephant in a well which is unable to come out on its own. Somebody needs to replenish the well. But can we find cheap capital to refill the well? The existing scenario signifies that the industry is at an inflection point and is staring at long-due price correction in order to improve sales. But is there a scope to bring down prices? In the current scenario price correction does not seem plausible. In order to stay afloat at such low profit margins, one or more stakeholders in the industry would have to step in and take a haircut. Who would it be?"
According to Liases Foras, the defaults of Infrastructure Leasing and Financial Services (IL&FS) and ongoing speculations about Dewan Housing Finance Corporation Ltd (DHFL) have made industry stakeholders anxious yet again.
"Moved by the sudden upheaval we have tried to gauge impact of liquidity squeeze on the sector and developers. In the past 10 years while value of sold stock has increased by 1.56 times, the value of unsold stock has become 4.72 times. In terms of units, volumes of sales have gone up by 1.28 times while inventory increased to 3.33 times between 2009 and 2018. In the same period lending to the real estate sector has gone up from Rs1.2 trillion to Rs4 trillion," it says.
Liases Foras feels that existing scenario has exposed the inefficiency within the sector. "While debt has grown in a monumental manner and so has inventory, sales did not go up in the same proportion," it says, adding, "Having borrowed money from different sources, developers kept adding housing stock into the market without any productivity. Since sales remained abysmal all this while, developers are finding it difficult to meet their debt obligation at this point."
Analysis done by the real estate data analytics company, shows that residential market generated Rs2,40,000 crore as yearly revenue in 2018. Top-8 cities, including Mumbai Metropolitan Region (MMR), National Capital Region (NCR), Bengaluru, Pune, Hyderabad, Ahmedabad, Chennai and Kolkata cornered more than 80% of the entire business. The top-8 cities generated Rs2,15,000 crore as revenue out of the total Rs2,40,000 crore.
Liases Foras also examined performance of close to 11,000 developers for a holistic view. It also noticed that out of the total kitty of Rs2,40,000 crore of business, top-90 developers in the country accounted for about third of business and generated Rs78,879 crore.
The firm studied exposure to both top-90 listed and unlisted developers. It took data for listed companies from public reports and sources, while for unlisted ones it relied upon the charge filings that the company submitted to ministry of corporate affairs (MCA).
The analysis shows total disposable income of all developers, including their rental income from different properties, is expected to be Rs57,000 crore but repayment required on their part is Rs1,28,772 crore. "In order to fulfil obligations, all developers will need to increase earnings before interests and taxes (EBDIT) by 2.26 times. Additionally to make profit of 15% the developers will need to increase the EBDIT to 2.60 times, or need to increase sales by 2.6 times," Liases Foras says.