Developers Feel Liquidity Crunch

by : John Parker

Developers in real estate have started the feeling of liquidity crunch as sources of funds are drying up. This is due to high interest rates by banks and financial institutions and high cost of construction, with the rise in steel and cement prices.

The crunch is getting severe because the banks, on receiving guidelines from the Reserve Bank of India, have further tightened the policy of extending loans to real estate developers because of slow recovery of loans.

According to experts, there is enough evidence to suggest that developers are feeling the crunch. Action transaction in the selling and buying a house/flat/ land has dried up. In small towns where developers have high sales, the cash flow is not coming. Developers have been selling flats on discount with various incentives like free parking or free registration or holding of EMI for certain period to reduce the overall cost.

The big projects are highly capital-intensive. It is becoming increasingly difficult for them to raise money through both equity and debt, thereby impacting their project execution plans.

In the absence of bank credit, which is either too expensive or non-available, realty firms have been borrowing from non-banking finance companies and high net individuals at a rate ranging from 18 to 30 per cent.

Till a year ago, real estate players were in a good shape. The capital market was booming, debt was available and a healthy property sale ensured good cash flow. The US subprime crisis has changed all that.

Another major hindrance has been enormous delay in obtaining various sanctions of plans, which means the investment on land keeps incurring interest during the time lag, thereby hiking the project cost. Besides, to maintain quality standards, the developers have to incur 20 to 30 per cent extra money in construction works.

Besides, the 1 per cent labour cess is an added burden on developers in most of the states.

While affordable or mid-range housing will see a sustained demand, the price hike may prompt other buyers to adopt a wait-and-watch approach.

For most large developers, particularly those with high unsold stocks of residential units and office space, a hike in interest rate would mean a direct negative impact on their bottomline. With reports of huge stocks of unsold non-SEZ, IT space and prospects of making a sale bleak, developers are in for a beating. They are affected when the cost of funds goes up. Servicing the term loans becomes difficult when they are left without revenue from lease or sales. Also the developers who have leased space are losing tenants because of the slowdown in IT.

Sales are down to 20 per cent compared to last year. Private equity players, too, are not as aggressive in pursuing a deal as they were a year ago because of the changed scenario in the real estate market and increased sense of risk in real estate projects.

Developers are also going slow on the construction of existing projects due to slowdown in the market. Builders are now borrowing on higher rates from inter-corporate deposits. These borrowings are generally for three to six months and they are borrowing with this understanding that the market will improve in the coming months. Developers in metros are now entering in bulk sales/deals, especially with IT companies at Noida, Gurgaon, Bangalore, Pune and Hyderabad on 20 to 25 per cent discount with a view to generating cash flow and also to adjust their outstanding loan from banks.