Close to tipping point

Font Size

Print

Feedback

Email

Discuss

: The real estate sector has been in distress mode and might be close to tipping point
The buzz about default in the real estate sector has grown in pitch. There are at least three consequences to a default. One, since most developers use short-term funds to finance their long-term holdings, a default in the short-term market will increase the credit squeeze on borrowers. Two, developers may have to let prices drop to ensure that defaults do not increase, freezing their source of funding. Post default price corrections are usually steep. Three, default in short-term markets will snowball into insolvency, when prices correct sharply. Real estate and property have sailed into the distress mode, and are close to the tipping point.

Lose-lose situation
Enough has been written about liquid funds and the redemption pressures they came under in the last two weeks. Many of them have now reverted to investing in very short-term liquid markets like the CBLO (the market for repos). Some have gone to the extent of saying that they do not hold any CPs (commercial paper) on their portfolios. Liquid funds are expected to provide investors who have short-term surpluses access to short-term money markets. This enabled deploying every rupee for every day, and earning market interest on that deployment. A simple strategy of a portfolio that is well laddered across CBLO, CPs, and CDs has worked well for these funds in the last 10 years. The portfolios have had good quality paper and carried no market risks. The earnings were almost completely made up of accrued interest. The redemption rush forced the sale of good quality paper at discounted prices, creating the panic. Mutual funds dominate the CP market. If they choose to withdraw from these markets, several NBFCs who have no other source of funding will find no lenders. The return to conservatism for liquid funds is likely to be lose-lose for investors and issuers of paper.