Financials of mid-sized real estate companies are strained as they struggle to service loans at a time when sales are sluggish.
Financials of mid-sized real estate companies are strained as they struggle to service loans at a time when sales are sluggish. For some of these firms, the interest coverage ratio has dropped to below one; in this club are Unitech, Marg Developers, Orbit Corporation, Parsvnath and Shreeram Urban Infrastructure.
That means their operating profits might not be sufficient to meet interest obligations. Puravankara, Hubtown, Omaxe and HDIL are borderline cases, whose interest coverage ratio is less than two. Capitaline lists at least 20 listed real estate companies as having an interest coverage ratio of below two.
Meanwhile the debt’s piling up: Cumulative borrowings of nine companies (excluding Marg Developers) rose to Rs 12,748 crore at the end of September, 2015 crore; in contrast sales added up to just Rs 4,055 crore.
Larger companies too seem to be in a bit of a spot; the aggregate debt of the top six listed companies (by market capitalisation) increased to Rs 38,817 crore at the end of September, 2015 whereas their sales, at Rs 10,378 crore, were at just around a third of that.
Sandipan Pal, an analyst at Motilal Oswal Securities, says cash flows at some firms are barely enough to meet interest obligations and construction costs though he points out the larger firms have strong banking relationships and that insulates them from a default.
Indeed, difficult as it sounds, even the most cash-strapped company is able to rustle up the resources to stay solvent. As one senior private sector banker points out, “We see no instance of default in the real estate sector despite fundamentals being very weak. Somehow, companies are able to cobble together funds to refinance their loans.”
Some firms are hoping to raise equity or mezzanine finance or even to dispose of assets altogether. Bankers, for their part, are hesitant to acquire properties that they hold as collateral especially those initial stages of construction. “That would be risky but we could look to take over property which is nearing completion since the chances of finding a buyer would be higher,” a banker explained. Motilal Oswal’s Pal believes companies might be willing to sell income-generating assets to ease cash flows.
Lenders are also playing midwife in trying to get companies to sign joint development agreements so that projects can be completed. Hubtown, DB Realty and the Sumer Group are some players in Mumbai that have signed such deals.
A November 2015 report highlighted how the combined debt of 25 real estate companies of close to Rs 30,000 crore face refinancing risk over the medium term. Orbit Corporation, which reported sales of Rs 5 crore in the past six months, will need to restructure loans worth Rs 528 crore by its own admission. The firm defaulted on interest payments of Rs 262 crore.
While new launches attract buyers because apartments are priced lower than in projects where construction is already under way, the weak sentiment is holding back builders. As Cushman and Wakefield has pointed out, new launches have fallen a sharp 72% in the last two years. With demand not expected to pick up overnight it looks unlikely companies will be able to de-leverage themselves soon. Moody’s assessment that property developers will ‘continue to face challenging operating environment over the next 12 months — including weak cash flows, flat sales and stagnant prices,” is likely to be spot on.