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Squeezed real estate firms eye asset sales, tie-ups

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Squeezed real estate firms eye asset sales, tie-ups
Debt-laden real estate firms, their situation exacerbated by poor sales in the last financial year, are looking at asset sales and strategic partnerships to clean up their balance sheet.
With sales not expected to pick up for at least another 3-4 quarters, top executives of realty firms said the focus is to keep debt levels from going up further. The top 10 real estate firms by market capitalization had a total net debt of Rs.45,723 crore as on 31 March.
India’s largest developer by market capitalization, Delhi-based DLF Ltd, saw its debt rise by Rs.628 crore to Rs.20,965 crore in the March quarter from the preceding three months.
The company, in its investor presentation, said it plans to bring in private equity (PE) investors at the project level as strategic partners, and optimize its debt profile by issuance of debentures and commercial mortgage-backed securities.
Others are looking to sell assets.
Mumbai-based Housing Development and Infrastructure Ltd’s (HDIL) net debt is around Rs.2,950 crore, after the company consistently tried to reduce it through sale of non-core assets and exited businesses such as entertainment.
The firm has put up its land parcels in Hyderabad, Vadodara and Kochi on the block in the last few months, and is also hoping that cash flows from its new projects will bring in relief for the company.
“Our focus has been on reducing debt, and we want to bring it belowRs.2,500 crore this year. We have already brought it down from Rs.4,200 crore since September, 2013,” said Hari Prakash Pandey, senior vice-president, finance and investor relations, HDIL. The company expects around Rs.700-900 crore of cash flow to come in during this year.
Sale of land, joint ventures, and PE capital (which will be the last option, according to Pandey) are the ways the company is looking to reduce debt.
Residential sales hit a low in the past year. The National Capital Region (NCR), the country’s largest property market, has a pile-up of inventory that will take at least 78 months to clear, according to property consultancy Liases Foras Real Estate Rating and Research Pvt. Ltd.
In the past year, the BSE realty index has fallen 34.66% while the Sensex has gained 4.5%.
In a 19 April report, Fitch Ratings Ltd says it expects Indian property developers to reduce debt in a significant way by the end of next year as the country’s investment climate improves. The process of reducing leverage stalled in 2014 due to weak sales and slower cash collections on properties that were sold towards the end of 2014 and in early 2015, as developers introduced easy payment schemes to stoke demand.
Stocks of large real estate firms such as Unitech Ltd and DLF plunged last week on account of wobbly fundamentals and fears that the Reserve Bank of India would not cut its policy rate any more (after a 0.25 percentage point cut last week).
Unitech, which has a total debt of Rs.3,565 crore according to Bloomberg and posted a consolidated net loss of Rs.162.54 crore in the March quarter, said it has brought down its debt and other liabilities, including telecom-related liabilities, significantly during the last financial year, and that all its telecom-related debt has been repaid.
“Unitech has been focusing on scaling up its construction activities and expects to increase deliveries considerably during the current year. Contracted sales of Unitech from its existing projects will yield positive cash flows for the company as the construction progresses, enabling the company to service its loans and gradually bring down the overall debt,” a spokesperson said in the context of a steep fall in the stock’s price.
“Apart from liquidating assets, joint ventures with other developers are a good way to keep leverage levels in control,” said Ravi Ahuja, executive director at property consultancy Cushman and Wakefield India.
Some developers, who don’t want to spoil their brand image, are selling at deep discounts to PE funds, rather than to retail customers, Ahuja said.
For the year 2015-16, Ansal Properties and Infrastructure Ltd is trying to replace expensive debt with cheaper loans as the company also tries to ramp up construction and delivery to enhance customer confidence, apart from selectively monetizing some projects, said Sunil Gupta, chief financial officer of the company.
“Debt reduction strategy will actually depend on how the market performs, and if sales start picking up and cash flows come in,” he said.
Not just top listed developers, unlisted firms are also struggling with high levels of debt and trying to refinance existing debt by taking on fresh debt or selling apartments in bulk to PE funds to bring down inventory levels.
“Debt levels have increased to a life-time high for unlisted developers compared to corresponding cash flow availability,” said Sunil Rohokale, chief executive and managing director, ASK Group.
The only sustainable way out, though, would appear to be higher sales.
Bengaluru’s Prestige Estates Projects Ltd, which has around Rs.3,200 crore of debt, clocked more than Rs.5,000 crore of sales last year.
Venkat K. Narayana, Prestige Estates’ chief financial officer, said the primary concern of a developer should be how capital is being borrowed and what the repayment strategy is.
“As long your borrowing rates are in control and your debt is balanced with corresponding sales, it is a good situation,” he said.
Mumbai-based Indiabulls Real Estate Ltd (IBREL), which has a net debt ofRs.5,480 crore, said sales in 2014-15 were reasonably robust at Rs.2,037 crore, up from Rs.1,549 crore the previous year.
IBREL’s debt levels are primarily high on account of the acquisition of the 22 Hanover Square property in central London and around eight acres of land in Thane last year, for a total cash outflow of about Rs.2,050 crore.
The company has over 38 million sq. ft. of saleable area in ongoing projects and in the pipeline and over 1,000 acres of fully paid-for land available for further development, a spokesperson said.
“Going forward, the company plans to focus on execution and delivery of these projects and use the surplus cash flows” to reduce debt, the spokesperson added.

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