After raking in phenomenal profits since 2004, builders, including some top guns in the industry, could be headed for serious trouble with the real estate market sliding rapidly.
Sources in the construction industry, financial institutions and individual investors have told TOI that several builders have started defaulting on interest payments and some of them have backed out of commitments to purchase land. Many builders are facing a liquidity crunch as sales of apartments are in a state of virtual stagnation. Moreover, politicians who had parked their slush funds with builders are now asking for their money back.
Information gleaned through these sources points to a dismal scenario set to unfold in the coming months. As one property expert who tracks the market minutely put it, "The real estate market has now moved from being under stress to a completely distressed condition.''
A plethora of recent cases seems to back up this claim.
A leading Mumbai-based developer who belongs to one of the country's leading construction families has backed out after offering Rs 700 crore to purchase the 18-acre Hindustan Composite land at LBS Marg in Ghatkopar. It's learnt that the same builder has also walked away from buying 3.5 lakh sq ft of the Pramanik Landmark land in Goregaon after having made an initial payment of Rs 40 crore.
This builder, who has constructed landmark buildings at Colaba, Peddar Road, Prabhadevi and the far-off western suburbs, is believed to have overstretched himself with an exposure of Rs 1,200 crore in the form of loans taken from banks and private individuals.
TOI has also learnt that a Delhi-based construction giant which was in negotiations for a 100-acre chunk of land at Kanjurmarg for about Rs 1,000 crore has suddenly turned around and said that it's no longer interested.
Another Delhi-based developer, currently undertaking a massive redevelopment project near the western express highway and also redeveloping a BEST bus depot, is facing difficulty in servicing its loans. "This company has started defaulting on interest payments to its bond holders,'' a source said.
A Mumbai-based developer, who recently purchased a plot in the Bandra-Kurla Complex for a phenomenal price, may also end up burning his fingers, say market sources. A confidential report prepared by a private bank, which was accessed by this newspaper, shows that this builder has a total loan exposure of almost Rs 3,000 crore. "He is finding it difficult to find tenants for his buildings. Even if he were to sell office space outright, he would have to sell it at a minimum rate of Rs 54,000 a sq ft. This is not possible because the record price in BKC today has not surpassed Rs 35,000 a sq ft,'' said an industry source.
Another construction company that may have overstretched itself is a south Mumbai property redeveloper, said a market insider. "His permissions are coming in very slow and he is faced with huge overheads,'' he added.
Interestingly, a Dubai-based construction company which faced an embarrassing setback a few months ago, is learnt to have taken a one-month loan at a huge 30% interest to bridge finance for one of its projects.
Asked to comment on the goings-on in the property market, HDFC honcho Deepak Parekh, who has his ear firmly to the ground, said, "We have been hearing about this crunch. It's natural to happen. Builders have made land purchases, but the cash flow from the sale of flats has slowed down considerably because of high property prices. Despite the slowdown, they do not want to reduce prices. So, they default on payments towards land and also because they have borrowed money at exorbitant rates.''
Parekh said he knew several big builders across the country who weredefaulting on payments, but refused to divulge their names. By a ball park estimate, both private and public sector banks have lent about Rs 20,000 crore to builders for construction purposes across the country. About one-third of this amount has been given to Mumbai builders, another one-third to Delhi developers and about 20% to Bangalore-based builders.
When asked if banks were jittery about builders defaulting on payments, a senior official of a leading bank said, "The phenomenon is cyclical. We will take over the assets of those who default. Banks will hold such assets until the market recovers and then sell them.''
Parekh added that HDFC would not be hit in such an eventuality because the bank takes a personal guarantee, including the builder's personal assets and his company shares.
ICICI home finance, on the other hand, has a board approved policy that monitors its real estate exposure. Loans are given only after looking at the developer's track record, his past ability to complete projects on time, his liabilities and the like. ICICI officials also pay regular site visits to see how the project is progressing.
Anuj Puri, chairman and country head of Jones Lang Laselle Meghraj, a global property consultancy firm, said he did not forsee any builder going "belly-up'' due to the stagnant property market. "They will now start selling their land portfolio at a reasonable value and enter into joint ventures with bigger developers.''
According to Suman Memami, research analyst, Religare Securities Limited, developers are facing pressure on their books because the cost of borrowing has increased while demand has come down significantly. "This is trouble for builders. The smaller ones will be wiped out,'' he said.
Memami added that developers were offering deepening discounts but flat rates were still at a significant premium. "The liquidity crunch is causing builders to postpone new launches. Furthermore, the cost of under-construction property is rising as commodity prices head north,'' he observed.
After the property market crash in the mid-1990s, several banks which had funded developers got stuck as the borrowers could not pay up. One such case was that of the erstwhile Global Trust Bank, which could not dispose of properties it took over from its borrowers when prices plummeted. These included an entire floor in a Nariman Point building, commercial space in Kodak House, Prabhadevi, and two partially completed towers in Mulund (west).
The Karur Vyasa Bank, which had financed Lloyds Steel to purchase a property, was similarly stuck after the 1994 crash. It finally managed to sell it several years later. In another case, Apple Finance had bought a BKC plot in the 1990s and constructed a ten-storey building with a loan from a nationalised bank. When the market crashed, it got stuck with the building, which the bank then took over. The bank then tried to sell it through the court receiver.
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