Bengaluru: High debt levels of large unlisted realty firms are prompting them to take steps to cut the cost of debt, or opt for a real estate investment trust (REIT) or an initial public offer (IPO) to unlock value in their portfolios. Unlike their listed counterparts, who have been more measured in their expansion plans and focused on debt reduction, unlisted developers have been aggressive in adding projects and buying land. In a depressed market, where home sales have been tepid and unsold inventory is at a record high, and project cash flows limited, it is not an easy task to keep debt in control.
In a 20 October rating note on Tata Housing Development Co. Ltd’s (THDCL’s) non-convertible debenture (NCD) issues, ICRA said the rating is constrained by the high indebtedness at a consolidated level at Rs3,993 crore as of 31 March 2016, up from Rs3,159 crore as of 31 March 2015, brought around by the significant ramp-up in the portfolio and slower-than-expected monetization of projects.
“The proposed NCD (fresh issuance of Rs.400 crore) is expected to be utilized towards replacement of debt falling due in the current fiscal. The reliance on external sources of funding is expected to remain high considering the impending debt repayment obligations, company’s expansion plans as well as the support expected to be provided to the projects during their initial phase. However, the expected funding support from the parent (Tata group) would enable THDCL to keep external borrowing within a reasonable limit,” the note said.
ICRA assigned a double A rating for both the proposed Rs.400 crore issue and an earlier one of Rs.700 crore. Tata Housing didn’t respond to email queries.
According to Reserve Bank of India data, loans to commercial real estate sector were at Rs.1.82 trillion as of 19 August 2016, compared with Rs.1.66 trillion a year ago. In the three-year-long slowdown, many developers have got a lifeline, with banks lending quite liberally, and non-banking financial companies (NBFC) lending to even those that have been denied by banks. External funding has eased the stress, but it has led to debt mounting on balance sheets of realty firms.
Bengaluru-based Embassy Group and Pune-based Panchshil Realty are looking at two separate REITs with partner Blackstone Group Lp, a move that will help in monetizing their large commercial office portfolios. Embassy Group has about Rs5,500-6,000 crore of debt. It has been active in adding new projects and buying land or entering joint venture developments. In October, the developer bought a 73.4% stake in Mac Charles Hotels Pvt. Ltd, owner of Bengaluru’s Le Meridien hotel, for Rs.640 crore.
“The REIT will allow us to disinvest a stake in our office rental portfolio and unlock capital. The rental income that it will generate will help us raise fresh debt,” said chairman Jitu Virwani. Typically, office developers stick to the lease rental discounting (LRD) model, where the debt is paid off by the rental income generated from a project. A REIT will help generate additional income for the stakeholders.
Panchshil Realty, whose net debt is over Rs3,000 crore, plans to list a REIT by the end of 2017 and wants to be debt-free by 2019, said chairman Atul Chordia. “We are comfortable with our debt levels, but if we sell faster, it will help in debt reduction. Debt has gone up heavily for real estate companies, but one can’t stop construction. As a result, external debt has to be raised. Bankers are also worried because if sales don’t get back to normal, there will be a lot of NPA (non-performing asset) accounts,” said Chordia.
The last time when real estate firms hit the primary market was in 2010. Paranjape Schemes filed for an IPO with the Securities and Exchange Board of India (Sebi) on 9 July 2015 and the proposal was cleared in December, but it is yet to launch its IPO. Mumbai-based Lodha Developers Pvt. Ltd, the country’s largest developer in terms of sales, plans to go for an IPO in about 18 months. The company, which has around Rs.13,000 crore of debt on its books, said it plans to cut the cost of debt.
“We can reduce debt or increase construction spend, and we choose to do the latter this year. We will spend an additional Rs.1,000 crore towards project construction so that we can speed up the pace and hand over more units. But we are consistently looking to reduce the cost of debt,” said managing director Abhishek Lodha. “Unlisted firms are likely to be more leveraged because they haven’t got a chance to tap the capital markets and have resorted to raising debt and other forms of finance,” said Shashank Jain, partner, transaction services, PricewaterhouseCoopers India.
Contributions from: Vishwanath Nair