Banks, lenders crack the whip on real estate firms for loan recovery5 min read . Updated: 07 Sep 2016, 03:52 AM IST
Banks are taking over realty projects, offices of real estate firms, also keen on jointly developing the seized land
Bengaluru/Mumbai: Banks and large lenders like Life Insurance Corp. of India (LIC) are auctioning assets seized from debt-laden property developers that have defaulted on loans in the face of a real estate downturn.
In recent months, banks have taken over ongoing projects, land and offices of real estate companies to recover their dues. A few banks have also approached real estate firms to jointy develop the seized land, said two top developers.
Confronting a crisis caused by slumping sales that have squeezed cash flows, developers are seeking more time from lenders to either repay or refinance loans.
“Developers are facing a lot of pressure from banks to repay. We also send loan proposals to banks on behalf of developers, but they are extremely stringent in evaluating proposals today. Banks also ask us to value certain properties they want to dispose of," said Rajeev Bairathi, executive director (capital transaction group and north India), at property advisory Knight Frank India.
According to Reserve Bank of India (RBI) data, total banking sector exposure to real estate developers was ₹ 1.83 trillion as of 24 June—an increase of 9.5% from ₹ 1.67 trillion a year ago.
State Bank of India (SBI) has taken “symbolic" possession of Orbit Corp. Ltd’s premium residential project in central Mumbai—Orbit Terraces—because of non-repayment of loans.
SBI is also planning to auction around 4,000 sq.ft of space in a building in Worli, a part of which is Orbit’s office. Symbolic possession means the bank isn’t in physical possession of the property, but is free to sell the asset.
“Banks have become strict and are initiating auctions wherever they can’t recover dues. We have the intent to repay and want to give banks and lenders an exit, but we need some time for that. We will find solutions to these issues, and believe in the next few years, we will be debt-free," said Pujit Aggarwal, chief executive and managing director of Orbit Corp.
At present, Orbit’s debt stands at about ₹ 850 crore, but barring two ongoing projects, construction and sales in most of its other projects are stalled. Financial troubles apart, many of its projects got stuck due to delayed approvals and constant changes in development regulations.
“Real estate auctions are how the bank props up its (loan) recovery book every quarter. Wherever the promoters do not have any clear indications of repayment, we will go ahead and take possession of the property to auction it later," said a senior SBI official, requesting anonymity. “In September, we will be conducting an all-India mega auction of properties where we have taken symbolic or physical possession. This mega auction is happening after at least nine months from the last large auction. In the interim time period, we have been advertising and selling small properties to bidders closer to the area of the property," this official added.
Aggarwal said that it currently owes a consortium of SBI and Union Bank of India around ₹ 76 crore for Orbit Terraces—construction of which is 70% complete.
Orbit Corp. owes SBI just ₹ 1 crore (out of the ₹ 3 crore loan) for the Worli property where its office is located.
“It’s a sad story. We’re in talks with SBI to reach a solution and discussing with our lenders to reach a settlement," he said.
RBI has continually flagged high levels of stress emanating from the real estate segment. Realty firms also featured on the list of sectors where the interest coverage ratio was less than one, indicating that their ability to service their debt was low.
Bank loans continue to be the cheapest form of finance in the hierarchy of capital providers to real estate. Though non-banking financial companies (NBFCs) and private equity (PE) funds offer better repayment terms to developers, they come at a higher price.
In another instance, LIC has taken notional or symbolic possession of Unitech Ltd’s land parcel on Noida-Greater Noida Expressway on the outskirts of Delhi.
A person familiar with LIC’s strategy, on condition of anonymity, said the Unitech property in Noida was under litigation.
Unitech had mortgaged the land to LIC and the money was raised on the basis of the mortgage. However, before paying off the dues to the investors, properties were built and sold to individuals who are now flat owners on the land.
When Unitech Ltd issued debt papers to raise the money from LIC, the papers were rated well and the returns too were attractive, so many investors purchased them, including LIC.
Afterwards, the realty market turned bad and inventories piled up, prices suffered and many real estate firms, including Unitech, failed to repay their loans.
“LIC declared the company a wilful defaulter, took possession of the securities, issued a sale notice and took steps to sell the property to recover the dues, but the company, along with the flat owners and the Noida Authority impleaded and jointly filed a stay application with Lucknow debt recovery tribunal (DRT) and DRT has given a stay," said the person familiar with LIC’s strategy, estimating total dues owed by Unitech to LIC, including interest, at around ₹ 2,800 crore.
In an email response, a Unitech spokesperson said, “We refuse your claim that Unitech owes LIC ₹ 2,800 crore. Rest... matter is subjudice and we cannot comment."
Mid- and small-sized developers are finding it tougher because they have limited projects and project-related cash flows to offer as collateral to lenders. While refinancing is an option, it means taking on new debt, often at a higher cost.
Executives at two real estate companies said they had been approached by large banks to discuss joint development of land parcels they had taken possession of from other developers, but haven’t been able to sell through auction.
“Auctions or any form of outright sale of land are not easy in this market, so joint development is a good option. Banks are looking at credible developers to partner and in such a partnership, we give them upfront money so the bank can write off some of the loans," said a top executive at a Mumbai-based realty firm who did not want to be named.