Glass and steel skyscrapers, dotting the wide expanse to the west of an elevated freeway linking suburban Mumbai to the downtown, were veiled at times by the diaphanous curtain of slanting rain in the first monsoon showers of the 2019 season. Ostensibly shining leitmotifs of India’s galloping economy, these towering symbols of enviable purchasing power also drew the veil on a far less enviable attribute defining some of the planet’s most expensive townhouses: Burgeoning debt.
The SoBo Manhattan silhouetted against Mumbai’s rain-drenched grey skies is, perhaps, the most manifest example of the money problems now roiling India’s property builders — and their exclusive financiers. In a span of just a couple of weeks, the Piramals — among India’s fastest-expanding developers and property financiers — sold strategic equity investments and originated loans worth around Rs 3,500 crore, at valuations far less enviable than the pace of growth the uber rich business family had recorded over the past decade.
Billionaire Ajay Piramal is among the handful of Indian businessmen considered extremely prudent. But his decision to exit in part the Shriram Group amid mounting pressure from the credit markets shines the spotlight on the section of para banks actually in intensive care — financiers to property builders. Financiers of other assets, such as cars, buses, trucks or individual homes, are not as badly hit as lenders to real-estate builders.
As the demolition initiated by the IL&FS credit squeeze gathers pace swallowing victims along the way, fault lines in the financial system are becoming manifest. The stragglers are quitting the race.
Smell a rat?
Builder loans are under the lens. This is the illiquid, opaque part of the real estate business that’s simultaneously the biggest employer in India and thrives on financing from beyond the official bailiwicks. In effect, therefore, builder loans could well be India’s own subprime.
“Given the fact that non-mortgage portfolios are inherently riskier, funding of such portfolios with both short-term commercial papers and shorter maturity debt has liquidity risk implications during times of uncertainty,” says the Reserve Bank of India (RBI) in its latest Financial Stability Report. “Incidentally, it is possible that compulsion to securitise and reduce balance sheets may lead to a situation where the HFCs end up holding riskier asset pools in their residual portfolios.”
While the noise has been that the entire non-banking finance (NBFC) industry, including housing finance companies (HFCs), are imploding due to risk aversion, a closer scrutiny reveals that largely lenders to builders are getting whipped.
“Of course, risks were higher for developer loans and the risks were accentuated by asset-liability mismatch for lenders,” said Venkatesh Panchapagesan, head of IIMB-Century Real Estate Research Initiative. “That was the trigger for this domino to come apart.”
That sinking feeling
The stress became visible from the second half of FY19, around the time IL&FS faltered on repayments, causing a paradigm shift in financing and causing venerable names in the HFC business to sell assets and meet commitments. The latest data, analysed by Crisil, show that loan growth to builders declined drastically since the autumn.
“Among the HFC segments, the distinction between the two halves was the sharpest for non-housing loans — primarily developer loans and loans against property (LAP)…that saw growth print around 5% (annualised) in the second half, compared with ~28% in the first,” Crisil said in a study on Monday. “Housing loans held up better, growing at close to 13% (annualised) compared with 18% in the first half.”
The contraction is a clear reflection that borrowing short and lending long can’t continue for eternity.
“We should be more conservative and have more long-term funds and now even the RBI has put up new policy document which in some ways will also push us towards that. We would rather err on the side of conservatism,” Ajay Piramal, chairman of Piramal Enterprises, told ET Now in an interview. “We have learnt that the single borrower exposure will have to be brought down because it creates unnecessary pressure in the market.”
The toxic cocktail of stagnant sales, rising inventories, and repayment schedules meant builder loans were likely to turn subprime. Builders continued to increase property prices to bake in rising costs and offset slowing sales. The stock of finished inventory in top 8 cities more than doubled between 2011 and 2018.
“It artificially inflated the inventory allowing developers to borrow more and remain solvent, and some lenders were more than happy to oblige owing to easy availability of finance,” wrote Nilajan Karfa, equity analyst, Jefferies. “Now with limited recourse to refinancing or rollovers, the debt-fueled structure is at risk of imploding.”
Unsold housing stock
In the past 10 years, the value of sold stock has increased 1.56 times, compared with 4.72 times the value of unsold stock. Sales volumes rose 1.28 times while inventory increased to 3.33 times between 2009 and 2018, according to Liases Foras, an independent non-broking real estate research company.
The disposable income of top-90 developers, including their rental income, is Rs 23,564 crore but the repayment required is Rs 45,128 crore, according to the Liases Foras report.
With funding drying up, developers are in a fix. Low refinancing and higher funding cost are affecting under-construction projects. Stressed debt is around $8-12 billion, said the Jefferies report.
“Money that developers would generally get from NBFCs and HFCs has not been forthcoming,” said Keki Mistry, vice chairman and CEO, HDFC. “Sales of real estate properties have slowed. Nudge from the government to banks that lending money to real estate is something that they should look at doing is important. That will help developers come out of credit problems.”
Loans to the housing sector fell 23% in the fourth quarter to Rs 54,167 crore, indicating that developer defaults are inevitable. To avoid defaults, lenders are considering building unfinished but viable projects, and asset reconstruction companies are considering buying reasonable-sized residential projects. Banks are taking over land parcels and unfinished projects that can be sold further with loans. “Immediate impact is the ability to continue construction,” said Panchapagesan. “Delay is inevitable, which could get developers in trouble with RERA…Some of the weaker builders may have to seek partners to complete projects by selling stakes.”
While banks slowed down their exposure to developers, NBFCs had aggressively expanded in this segment. Total developer loan is estimated to be $80 billion, of which $50 billion is low-risk lease rental discounting. Core developer book, which is $30 billion, is split equally between banks and NBFCs. Between 2016 and 2018, NBFCs grew 36% in this segment while banks expanded at 4%.
Survival through stake sales
To tide over the difficult times, housing finance companies are selling assets and meeting their liquidity needs. DHFL has sold two subsidiaries, Aadhar Housing Finance, an affordable housing finance company and Avanse, an education loan company. They have sold several portfolios to banks by way of securitisation.
From April 1, GST rates have been lowered from 12% to 5%. Will that alone help revive sales?
“We perceive there would be a clearing price for all projects, and lenders, mostly NBFCs, may have to take some haircuts,” said Karfa. “The critical question therefore to ask — for which we don’t have an answer yet — is whether the stock price correction in certain HFCs and NBFCs prices in those potential unquantified haircuts.”
The impact of developer defaults on individual NBFCs are going to be huge given the higher mix of developer loans in their books. But the political and economic reality will ensure stable policy from the government and regulators as real estate is a big component of job creation and economic activities. The ball is now in their court.
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