The current slump in the real estate sector has left buyers cautious with the result that banks and asset reconstruction companies (ARCs) are finding it hard to liquidate property. The recent auction of Kingfisher House in Mumbai, a 3,988-square metres establishment in the suburb of Vile Parle flopped, possibly because the reserve price of Rs 150 crore was too high. Perhaps it was but even more reasonably-priced offers aren’t going through. Last year, a team comprising Blackstone and Panchshil Realty, backed out from the purchase of a property belonging to Kohinoor Mills; they were not comfortable with the price. A senior executive at an ARC told FE it had attempted to auction a property in Kolkata, at what was considered to be a realistic reserve price of Rs 140 crore but that it had not met with any response. Where banks have tried to be reasonable, they have been are accused of colluding with buyers. Industrial Financial Corporation of India (IFCI)’s attempt to sell the collaterised Park Hyatt Hotel in Goa to ITC for Rs 515 crore, for example, was thwarted by Blue Coast, which had defaulted on its loan obligations. The company went to court alleging collusion between the lender and the buyer.
In an environment where buyers are shying away from deals whether over valuations, the need to make a lumpsum payment or litigation in the future, assets mortgaged with banks and ARCs are piling up. As Eshwar Karra, CEO of Phoenix ARC, confirms, selling assets outright, whether they are land parcels, residential complexes or even commercial buildings is challenging, adding that sales are even more difficult in in Tier II and Tier III cities.
Siby Antony, MD & CEO of Edelweiss ARC, points out that the disadvantage of a high reserve price is compounded by the short time frame for payments. “Under SARFAESI, collections from the sale of these assets should not take more than a month’s time, which is a difficult condition to meet,” Antony explains, adding that typically, buyers like to pay in tranches. Another hurdle is that buyers understandably want 100% ownership. However, ARCs only have control to the extent of the collateral. One senior public sector banker observed that disposing off land has become difficult thanks to buyers forming cartels. “For instance, where the promoter is influential, he can stop investors from bidding for the property,” the banker said.
In the meanwhile, Phoenix’s Karra believes lenders may start roping in builders to jointly develop property. Joint developments, typically profit-sharing arrangements, have been on the rise between developers over the past year. The continuing sluggishness in the market could see such symbiotic relationships between lenders and developers with banks, roping in builders to construct on land pacels that they’ve seized. Antony agrees it’s a possibility. “We prefer to work with the promoters and make the project viable,” he said. In January, Edelweiss ARC, which had acquired close to Rs 250 crore worth of loans given to Kohinoor Infrastructure, lent it an additional sum to help the promoters complete the commercial project.
Karra too said that once lending institutions and ARCs takes over assets and finds a way to develop rather than fire-sell in a tepid market, project value can possibly accrue when it is sold without the stigma of distress, which naturally come with a steep discount connotation. In February, ICICI Bank took over land owned by Jaiprakash Associate’s in Uttar Pradesh after the company failed to service its debt obligations. Sources said the bank may not sell the land immediately, given the market here has been one of the hardest hit.
However, it could at a later stage rope in a builder to construct a property. ICICI Bank did not confirm this.
The auction of Kingfisher House found no takers
Blackstone-Panchshil backed out of Kohinoor property purchase
ARC unable to auction Kolkata property
Sale of pledged property by IFCI to ITC stalled by court