Real estate not yet out of the woods; top realtors facing refinancing risk

MUMBAI: Real estate is not yet out of the words as top realtors are still facing refinancing risk with diminishing demand for properties.

“As much as Rs 30,000 crore of debt obligations will face high refinancing risk with demand in their respective markets expected to be tepid over the medium term,” rating company Crisil said in a release.

The Crisil analysis involves top 25 realtors, which form 95% of the market capitalisation of the sector.

The past two years have seen realtors refinancing principal and interest obligations, some by leveraging the cushion available in their operational commercial portfolio, it said.

“Add to that the problem of construction cost outpacing customer advances lately, and developers seem to be caught in a debt spiral.”

Recent regulatory measures such as relaxation in foreign direct investment ( FDI), and recourse to funding through non-convertible debentures (NCDs) and private equity, are expected to provide some respite in the short term for the sector.

The flipside, however, is the high returns expected by private equity investors compared with the relatively low cost of bank loans.

“Assuming this to be 20% per annum, the cumulative payout by the sector over a 5-year horizon can be as high as Rs 85,000 crore. This can amplify refinancing risks by an order of magnitude unless demand picks up substantially,” Crisil said.