Bengaluru: Refinancing transactions, the lifeline for the realty sector, have dropped by almost 50%, compared with a year ago, when such deals were at their peak, signalling poor quality of projects, coupled with slow sales and high debt. In the past two years, developers mainly relied on refinancing to meet their debt servicing obligations and, sometimes, to reduce cost of debt, given cash flow constraints. Such refinancing provided a cushion for developers to hold prices despite slowing sales.

Of late, non-banking financial companies (NBFCs) and private equity funds—the main source of funding in real estate, with banks being cautious—have become more prudent about taking on refinancing risks.

“In the quest for rapid growth in market share and assets under management in recent years, a few lenders lent to developers in excess of the value of the underlying assets or projects. Several developers gladly took the enhanced debt, used that money for unproductive uses and are now faced with imminent default after several rounds of refinancing and several years of interest servicing. The fact that sales price has come down moderately has only worsened matters for lender’s cover on these projects," said Amar Merani, managing director and CEO, Xander Finance Pvt. Ltd.

There are several projects that can’t afford to take incremental debt and can’t be refinanced by a new lender since they’re leveraged to the top. What happens to the huge inventory and supply in these stalled projects is anybody’s guess. As a result, exits may also get delayed because with project cash flows being weak, lenders may not find new investors to step in.

“Refinancing transactions have dropped dramatically, by more than 50%, compared with two years ago. Home sales are still slow, new projects are not being launched and so there’s not much security that’s left in a project, or with the developer to offer. Real estate is all about pricing; so wherever the developer feels he can’t sell, he is reducing prices, which helps him to pay off the debt (to lenders) for a quarter," said Ambar Maheshwari, chief executive (private equity), Indiabulls Asset Management Co. Ltd.

Several developers have done multiple rounds of refinancing, often for the same project, in 5-6 years and now that refinance is very tough to do due to lack of adequate security cover, stressed firms will be pushed to do joint development agreements with branded tier I developers in the post RERA regime.

“...I see quite a lot of stressed developers not wanting to cede control or economics to these large tier I developers. If they don’t tie up very soon, there is just no option but to sell inventory at clearing (low) prices, collect funds and continue to construct, deliver," Merani said.

Liquidity over profitability will have to be the strategy for many of the troubled developers and as a result, apartment prices may come down further after 3-6 months, property consultants say, especially in the oversupplied micro markets of Mumbai and National Capital Region. This is particularly true of the luxury segment where prices are expected to reduce even further due to near absence of buyers at current levels.

“NBFCs will enjoy their run for some time, till the sector revives and bank funding opens up. But developers will face margin pressure if they have to sell at lower prices," said Ram Yadav, chief executive officer, Edelweiss Real Estate Advisory Practice.

Amit Goenka, managing director and chief executive of Nisus Finance Services Co. Pvt. Ltd (Nifco), said capital flows are gravitating towards more organized and focused players.

“Funding having significantly dried up from the banking sector may further dry up from NBFCs, funds and private capital providers too, for the small-sized developers. The cost of capital to good developers will come down and more capital will be available to the better players, increasing ticket sizes per deal," Goenka said.

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