Bangalore: The disappointing listing debuts of two realty firms have put the brakes on plans by 10 property firms to raise a total of Rs16,885 crore through initial public offerings (IPOs).

The hunt is now on for alternative sources of cash, needed to fund construction and to repay debt, as real estate companies face the prospect of having over-extended themselves so soon after the slump that two years ago took the industry to the brink.

Graphic: Paras Jain / Mint

“IPO money is primarily used as growth capital. So projects in the pipeline will be impacted if there are delays," said Amit Goenka, national director (capital transactions) at Knight Frank India Pvt. Ltd, a property advisory. “Delays may lead to deferring or cancellation of project launches, and expansion, as a result, will be slow."

The rush for IPOs took place as the market showed signs of a revival, with demand for homes and property prices improving.

Last year, real estate companies had found a steady source of funding in qualified institutional placements (QIPs), raising a total of nearly Rs12,600 crore. Unitech Ltd, India’s second largest developer by market value, raised around Rs4,240 crore through two QIPs in April and June.

The developers find themselves caught between a volatile market and the urgency to raise funds for a robust pipeline of projects, say analysts. Collectively, the 10 firms have around 150 million sq. ft of development planned. About a quarter of the IPO funds were also to be used to retire debt, said the developers.

Godrej Properties Ltd, the first realty firm to go public in about two years, opened 5% higher than the issue price on listing in early January, but has since declined and was trading about 6.4% lower than the first day’s close at Rs500.45 on the Bombay Stock Exchange on Thursday. DB Realty Ltd’s listing in February was around 3% lower than its issue price and the stock has fallen further since then. The BSE Realty Index has declined 12.5% since 1 January, even as the benchmark Sensex has risen 0.3%.

“There’s no rush and we are watching the market situation because investors aren’t too keen on listings," said Abhisheck Lodha, director of Mumbai-based Lodha Developers Ltd, which had plans to raise Rs2,793 crore through an IPO. “Realty stocks have fallen substantially in January and February. There have been two listings so far and no one has made money."

Lodha depends largely on residential projects and has nearly 29 million sq. ft of space under development.

BPTP Ltd, which wants to raise Rs1,500 crore via an IPO and has 39 million sq. ft under construction in the National Capital Region, plans to meet investors to get a sense of the market. It’s currently awaiting approvals from market regulator Securities and Exchange Board of India.

The developer has received about Rs3,000 crore against customer bookings and needs another Rs1,100 crore to complete its current projects, said Sunil Jindal, chief financial officer at BPTP.

Of the IPO proceeds, BPTP plans to use Rs459 crore for construction and Rs325 crore to repay debt. “We also have Rs2,500 crore of outstanding booking amount," said Jindal.

Param Desai, a research analyst with Angel Broking Ltd, said debt repayment is not so much a concern now for most firms as are execution and the sale of projects.

“Most realty firms have launched too many projects and investors still remain negative about commercial and retail segments, though residential sales have improved," said Desai.

For instance, Nayan Bheda, managing director of Mumbai-based Neptune Developers Pvt. Ltd, which has 14.47 million sq. ft under development, said the firm wants to use about 20% of funds raised through its proposed Rs495 crore IPO to retire debt and the rest to launch new projects.

Developers have also realized that land buying shouldn’t be the focus anymore and now feel the pressure to perform and sell stock, said two analysts from two different brokerage firms.

Nitesh Estates Ltd’s plans, for example, present significant funding and execution risk, rating firm Crisil Ltd said in a 2 March research report. Crisil gave a 2.5 IPO grade to the Bangalore-based realty firm, which aims to raise Rs450 crore from an IPO and has about 5.2 million sq. ft of space under development.

“The IPO grade reflects the company’s entry into the highly competitive mid-income housing segment, and development of retail, commercial and hospitality projects, in which the company has a limited track record," Crisil said in its report.

Nitesh Estates declined to respond to Mint’s queries.

Some property developers, meanwhile, are looking at alternative strategies.

“With markets being volatile, if there’s a delay in the IPO, we will prioritize our project launches," said Abhijit Sarkar, head (corporate communications) at Sahara Prime City Ltd.

The firm, which wants to raise Rs3,450 crore through an IPO, has 16 township projects under way, mostly in the country’s smaller cities, and plans to use Rs2,667.70 crore for construction. For its 77 coming projects, it will explore a mix of debt and equity financing, said Sarkar.

Developers such as Sahara and Kumar Urban Development Ltd are also looking at private equity (PE) funds.

“PE funds are waiting on the sidelines so that when some of these IPOs fall through, the fund-raising plans will be passed on to them," said Subhas Bedi, director at Red Fort Capital Advisors Pvt. Ltd.

With no appetite for real estate IPOs now, Knight Frank’s Goenka said some developers are selling projects to long-term investors by offering bulk stock at 30-40% discount.