Debt obligation of 25 real estate companies, comprising 95% of the market capitalisation of the sector, worth Rs 30,000 crore will face high refinancing risk with demand in their respective markets expected to be tepid over the medium term, according to a report published by CRISIL. The past two years have seen realtors refinancing principal and interest obligations, some by leveraging the cushion available in their operational commercial portfolio. Add to that the problem of construction cost outpacing customer advances lately, and developers are now caught in a debt spiral.
The report also said that while traditionally, bank loans have been the primary source of funding for real estate companies (meeting 90% of the requirements of India’s top 25 developers), the net exposure of banks to the real estate sector declined 1% in the first half of the current fiscal. This was driven by refinancing risks, which increased due to the widening funding gap in the operations of realtors. Going forward, incremental bank funding is expected to decline by 5%. The shortfall is expected to be met through alternative sources such as non-convertible debentures (NCDs) and private equity (PE). However, the high return expectations of these funding sources as compared to traditional bank lending will increase refinancing risks over the longer term unless demand picks up substantially.