Real estate developers pull out all stops to reduce debt
Bengaluru:Real estate developers, reeling under a massive burden of debt and dwindling sales, are pulling out all the stops to reduce leverage by raising equity capital, selling land, exiting long-term projects and non-core businesses.
While large developers are tapping equity capital for debt repayment, other stressed realty firms, staring at defaults, are resorting to repeated refinancing of loans. Top office space developers like DLF Ltd, Indiabulls Real Estate Ltd (IBREL), Prestige Group have raised equity capital by selling stake in office projects, some of which will be used to reduce debt in their residential portfolio. Last week, IBREL signed up with Blackstone Group Lp to sell 50% in its office projects in Mumbai for Rs4,750 crore.
The developer, whose rental projects and (residential) development arm has Rs4,205 crore and Rs5,313 crore of debt respectively, said a substantial part of sale proceeds would be utilized towards repayment of existing debt and for achieving long-term growth.
“The money from the transaction will be used in reducing debt in the residential portfolio,” said a person familiar with the company’s plans, who didn’t wish to be named.
The Mumbai-based firm also sold its Chennai township project to Ozone Group for Rs285 crore to exit a non-core market. India’s largest developer DLF Ltd, with around Rs27,000 crore of debt as of 31 December, plans to reduce debt by Rs9,000 crore in the current financial year. By March, 2019, DLF’s residential development will become net debt zero once the rental business is carved out as a separate entity, Mint reported recently, after DLF promoters sold a 33.34% stake in its rental arm to GIC Pte Ltd for Rs8,900 crore. It was a game-changing deal for the firm which will eventually help de-risk its balance sheet and shrink debt that have been a cause of concern.
Due to the ongoing slowdown, operating cash flows have remained weak and developers are dependent on external financing to ease out stress. They need to raise more debt to construct and deliver projects as buyers demand timely delivery. Bengaluru’s Prestige Group, which signed a term sheet with GIC to sell a 40% stake in a portfolio of office projects for around Rs2,000 crore, plans to stay cautious on its debt levels.
“A lot of our inventory is getting completed and there will be a lot of cash coming in. Around 60% of the debt is in the lease rental business and 40% is in the residential business. My endeavour is to see that (the residential debt) also isn’t there in the books,” chairman and managing director Irfan Razack said.
In the new regulatory regime, no project can be launched without approvals. Customer advances, a major source of incoming cash for developers during launches, can’t be solicited until all required approvals are obtained. As a result, most developers have to raise external funding to get the project started, leading to a rise in debt.
Leverage levels are unlikely to reduce anytime soon, analysts said.
“Many developers have leveraged their balance sheets to an extent that has made it impossible for them to manage their debt repayment schedules. With pressure to repay existing debt, many tier II and tier III developers are likely to declare bankruptcy in the near future, pushing the cause of large-scale consolidation,” said Anuj Puri, chairman, Anarock Property Consultants.
Mumbai’s Lodha Group, which has around Rs16,500 crore of debt, plans to reduce it by more than Rs1,000 crore in 2018-19 after reducing the cost of debt by over 1%.
“From our internal cash flows, we will now look at a meaningful reduction in debt,” managing director Abhishek Lodha said.
It is expected to file for an initial public offering soon and much of the proceeds will be towards debt reduction, said multiple people familiar with the development.
Mid-sized firms that don’t have easy access to equity capital and have significant project inventory will need to either sell off assets, tie up with larger developers for projects or refinance high-cost debt with low-cost capital.
Century Real Estate Holdings Pvt. Ltd, which has Rs800 crore of debt, was planning to sell some of the land parcels to pare leverage levels, but managing director Ravindra Pai says it’s “a difficult market to sell land”.
Supertech Ltd plans to divest some of its shopping malls and hotels in north India to raise around Rs1,000 crore, which will be used to generate liquidity for the business and to reduce debt, said chairman R.K. Arora. It also expects receivables of around Rs1,000 crore from its projects, which could be used to repay debt and complete projects.
“Not only debt, there is stress on profit margins because of project delays and slow sales. Cost of borrowing has gone down for many developers as lenders are willing to give money at lower rates. But with prices not rising anytime soon and cost overruns and interest costs owing to projects getting stretched, margins are getting squeezed,” said Shakti Nath, chairman and managing director, Logix Group.
In the past year or so, some developers have faced insolvency threats and default risks. According to a petition filed by ministry of corporate affairs (MCA), Unitech Ltd has defaulted on debentures worth Rs251.78 crore and owes small depositors Rs596.76 crore. Unitech, whose promoters are in jail in a case of alleged forgery and has around Rs6,733 crore of debt, said in January that it finalized sale of two pieces of land in Chennai for Rs400 crore to refund buyers and for project completion.