Realty sector debt burden in first quarter grows by 16% to Rs385 billion, as profits decline by 19%
Moneylife Digital Team 25 August 2011

DLF alone has a debt of Rs215 billion; companies struggle to raise funds, try to sell land parcels to repay debt, cut losses. Analysts, consultants say developers depend on an improvement in project sales, which can only happen after a correction

Companies in the real estate sector have suffered a 19.5% decline in first quarter profits, according to Edelweiss research. The brokerage has forecast that the next two quarters are unlikely to see any improvement on account of high interest rates, margin pressures and burgeoning debt levels.

"Although the sector posted steady operational performance year-on-year with revenue surging 8.7%, the profit dip of 19.5% across 14 companies clearly reflects the double whammy of rising input costs and higher interest rates," the brokerage said in a report published this week. "While sales volume at the pan-India level was steady, the Mumbai property market continued to post lacklustre sales."

With decreasing cash flows, companies are finding it difficult to pay off high interests on borrowings. Particularly glaring were the performances by DLF and Unitech, the country largest realty companies.

Edelweiss reported that the debt situation is especially bad. A combined net debt of Rs38,500 crore for 11 companies represents a 15% rise in net debt over the corresponding period last year. For Q1FY12, DLF's debt stood at Rs21,520 crore, which is a 16.6% increase since last year. Unitech and HDIL posted a debt of Rs5,330 crore and Rs3,920 crore respectively. The only company that seems to have escaped the burden is Oberoi Realty, it said.

Many realty companies are now selling land parcels in order to cut their losses and repay debts. DLF was recently reported to be looking to sell a 13 acres in the Gurgaon-Haryana region, expecting this to bring in Rs300 crore. The company is also trying to sell land in Calcutta and Hyderabad. Hotel Leelaventure has sold its Kovalam property, again to reduce debt dues.

Raising private equity appears to be difficult also. Real Estate services firm Jones Lang La Salle estimates that the liquidity crunch will reduce fundraising through the QIP route and there will likely be a decrease in real estate IPOs too. "Margins will in any case be squeezed by the increased construction costs brought on by inflation," said Ramesh Nair, managing director-West India, Jones Lang LaSalle.

Not very long ago London-based PE fund Trinity Capital pulled out of a realty project in suburban Mumbai Bandra area. This is the second instance the company has pulled out of a project, both of them by Keystone Realtors. Worse, according to information available, PE funds backed by big realtors like Ackruti City, Shapoorji Pallonji and Unitech promoters have failed to achieve their fund-raising targets.

"When alternate means of funding become expensive and unviable, the only way out is sales. Capital is not available otherwise," said an analyst. The Mumbai and NCR regions are already seeing a slowdown in sales. "NCR-based players could see an incremental slowdown. But any recovery in Mumbai volumes is contingent on reduction in prices and movement in project approvals over the next two quarters," Edelweiss says.

Strangely, prices continue to be high. "Prices would take a longer time for correction, but it has to happen," said Pankaj Kapoor, managing director, Liases Foras. "They may not reduce prices immediately, but we can say that a 30% correction may be seen in one or two years."

1 decade ago
Many of these real estate companies have probably transferred funds abroad from their listed companies into tax free havens by an assortment of routes. Now that the values of these properties are down, they can and will probably buy them back through the FII or PE route in their own unlisted entities, leaving, what else, the investor holding the losses. Welcome to the real world of FII and Participatory Notes.
1 decade ago
please do a write up on the pawan ruia (dunlop and falcon) group companies and why there has been this amazing 5 days of consecutive lower circuits

i understand most shares are pledged but can that alone explain the absurd sell off?
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