Realty companies’ financial woes to mount

MUMBAI: The woes of realty developers may not ease anytime soon as pressure to repay debt and redemption of quasi-equity instruments continue to be a major task for them.

Repayment of structured quasi-equity instruments totalling Rs 3,000 crore held by foreign investors is due in the next couple of months and this is expected to stress already cash-strapped developers.

Redemption of these instruments is likely to coincide with developers’ loans that were rescheduled by banks two years ago and are now expected to come up for repayment around March.

As external commercial borrowings are not allowed in the realty sector, some cash-strapped developers had placed non-convertible debentures with non-banking finance companies, listed these debentures and then offered these to foreign investors.

At least four developers, three from Mumbai and one from Bangalore, had raised over Rs 1,000 crore almost a year ago through this route. These funds raised by some realtors through quasi-equity instruments around three years ago went to supporting their ongoing projects and land acquisitions.

However, most of these foreign investors may not be interested in converting these instruments into equity and hold stake in these realty projects, given the weakening demand for residential units and possibility of a fall in prices, analysts said.

“Builders will find it difficult to repay overseas investors since few local banks are willing to take large exposures. With the stock market entering a bearish phase, the prospects of IPOs are also dim,” said a senior official of a realty fund.

In a few cases, the matter may boil into legal disputes. “However, many of the structured papers are not enforceable debt and foreign investors may be left with little recourse,” he said.

Consensus on a fall in realty prices hereon is getting stronger as almost all the market participants, including consultants who undertake sales of these projects on behalf of the developer for a fee, have also estimated at least 15% correction.

Mumbai, the country’s financial capital that led the appreciation in realty prices in the past 12 months, is now expected to lead the correction in property prices owing to buyers’ resistance to higher prices, rising interest rates, tightening of credit, and an excess supply scenario.

An indication of this has already come through falling numbers of registrations at stamp duty and registration offices across Mumbai. After gaining nearly 40% in the past one year, residential property prices in Mumbai have already surpassed their last peak witnessed in 2007 and scenarios are almost similar across major locations such as the National Capital Region , Bangalore and Hyderabad.

Interest rates that have started moving higher are impacting affordability and delaying decision making and all of this is not allowing the demand to get converted into sales since the past two quarters.