Our study on the listed companies in real estate sector and data points suggests that the sector has an extremely high exposure to debt; in smaller, mid-rung companies, the debt/market cap is more than 2x.
This exposes these companies and their lenders to high risk of default, should they be unable to sell their inventory; this is because, the cost of carry is very high for the real estate companies and their lenders.
The recent erosion in the market cap of these companies with the meltdown in the equity markets has further accentuated this risk.
Our conversation with real estate/construction and infrastructure companies revealed that their peak borrowing rates had eased by 100bps; moreover, their margins are also likely to squeeze by 150-300bps as sales cycles get elongated and the cost of carry remains high.
With new equity financing on hold due to unfavorable capital markets, prevailing high interest rates, and reluctance of banks to lend to real estate sector, the sector is becoming vulnerable to defaults.