As the liquidity crunch deepens for non-bank lenders to real estate and the sector continues to battle tepid home sales, various stakeholders are looking at ways the crisis can be handled and resolved. However, the consensus is that a recovery isn’t happening anytime soon. In a telephone interview, Amit Bhagat, CEO and managing director, ASK Investment Property Advisors, part of financial services firm ASK Group, spoke about overcautious lenders, good projects turning bad and the possible resolutions to sail through the crisis.
How has the liquidity crisis impacted real estate lending?
There has been a sea-change in the attitude of lenders- they have started perceiving risk very differently due to the liquidity crunch. Their aggressive posture has changed to an overcautious approach. Beginning April 2019, only a few housing finance companies (HFCs), who managed liquidity well, looked at fresh construction financing with a caveat that their funds would not be utilized to refinance earlier lenders. This approach rendered refinancing, until then an industry norm, extremely difficult and the projects which had partly undisbursed loans started suffering.
How do you evaluate the current state of the residential sector? Which developers will survive?
In the residential sector, the liquidity freeze has created a situation, wherein the investors have vanished and end-users are only interested if they are convinced of completion and delivery. Those developers, who haven’t committed too many mistakes (such as buying high-cost land in the last five years especially with leverage) are better off. Mismatch in planning is another reason – while the demand existed in lower-mid segment, the supply was planned in the upper-mid segment. Focus on customer was always relevant but became more critical since it has become a buyer’s market due to increase in supply.
Prudent leverage at organization and project level i.e. financial closure is a pre-requisite for success. Finally, with markets being regulated and customer being empowered, being compliant is the only option. Finally, cost optimisation will protect declining margins.
Along with the lending freeze, did RERA put more pressure on developers?
Developers have to complete projects as per committed timelines to customers and as disclosed to the Real Estate Regulatory Authority (RERA). Consequences of delayed delivery are customer complaints, litigation, penalties and reputation risk. Equity for land, working capital tie up, focus on sales and receivables with no diversion of funds is an integral part of financial discipline required in this regulated environment.
Do publicly listed developers have any advantage?
Some listed developers had the advantage of raising money through a QIP etc, to deleverage themselves. Developers with income yielding portfolios could monetise by selling such assets to foreign institutional investors.
Have private equity funds managed to fill the funding gap in any way?
The size of the liquidity problem seems large. The total outstanding debt to the real estate sector is ₹6-7 lakh crore, out of which NBFCs and HFCs account for around ₹2.5-3 lakh crore. Just a handful of PE funds have capital to deploy and can’t create a meaningful impact.
What’s the solution then?
AB: On the demand side, the buyer in the mid-segment also needs additional tax incentives to buy. Currently such incentives are only available to affordable segment (upto ₹45 lakh a unit). If an existing project cannot be revived and is unviable due to diversion of funds, the lenders and investors need to take haircuts. The process has begun and will have to continue. In case of luxury or upper mid segment in major cities but particularly in Mumbai, the affordability of customers was overestimated and the problems became more visible after the liquidity crisis. Developers have realized the real demand focus and are planning accordingly.
Non-availability of working capital can choke and destroy any industry. Real estate is one of the most important sectors and lenders should look at this sector constructively to facilitate solutions and revival of stalled projects. There is also an urgent need for permitting one-time financial restructuring to deserving cases for which government and regulator support is essential.
What has ASK’s strategy been?
As a private equity investor, we must select the right projects in the growth corridor with reputed developers in the mid-income or affordable category. We at ASK have increased the pace of commitment and deployment in 2019.