Real Estate - Reeling under debt

By M H Ahssan

Unitech, the second biggest real estate player is overburdened with short term loans and is struggling to keep its head above water. The company's difficulties are further compounded since they are unable to raise fresh loans to service existing ones.

Overburdened with short-term loans and facing serious cash-flow problems, India's second biggest real estate player Unitech Ltd is struggling to keep its head above water. It is facing difficulties in raising fresh loans to service the existing ones, with bankers and financial institutions wary of lending to the real estate sector when stock markets are in the dumps. Meanwhile, credit ratings agencies have downgraded the company's various loan instruments on concern that it might default on repayment. The company has failed to mobilize required Rs. 5,000 crore fund as per schedule. And given the widespread perception that the real estate sector is due for further price correction, Unitech's fund mobilization plan seems unlikely to be going anywhere.

Unitech has a total debt of about Rs 8,000 crore, of which Rs 2,500 crore was due for repayment in the period up to March 31, and another Rs. 2,500 crore later in 2009. But taking advantage of the government's stimulus package, Unitech has got loans worth Rs 1,000 crore rescheduled. It is negotiating with banks for roll-over of another Rs 500 crore loan. As part of the second stimulus package, the Reserve Bank of India has relaxed non-performing asset (NPA) classification norms for commercial real estate advances, which are restructured till June 2009.

Meanwhile, the Industrial Finance Corporation (IFCI) sold 1.75 crore shares pledged with it by Unitech promoters at the National Stock Exchange (NSE) in a bulk deal. The IFCI resorted to this move after the promoters defaulted on repayment of loans raised against the mortgaged shares. That indicates that Unitech is having problems raising money.

The IFCI's move that came just ahead of the extraordinary general meeting (EGM) called by the company on January 19 to seek investors' approval for raising Rs 5,000 crore to meet its loan repayment obligations, put downward pressure on Unitech's share prices. Analysts expect a further drop in the coming trading days.

Hardnews finds out, Unitech promoters have been periodically pledging shares since March 2008 to raise money. The promoters borrowed Rs. 200 crore from Indiabulls Financial Services, which was repaid in November 2008. Analysts believe about eight per cent of the promoter shares are pledged with lenders. One of the non-banking finance companies (NBFCs), DBS Chola Finance, had on December 24, 2008 sold 1.28 crore shares of Unitech's shares.

Meanwhile, international credit ratings agency Fitch has downgraded Unitech's various loan instruments on concern that the company might fail to raise funds to meet repayment obligations on its short-term debts. Fitch has said that the downgrade reflects the company's continued delay in raising the required funds as earlier projected and increasing uncertainty regarding its ability to service its interest cost and fulfill its immediate debt and land payment obligations.

Fitch has also noted that Unitech's immediate ability to service or refinance its debt obligations is largely dependent on asset sales and the cash inflow from Telenor ASA to repay an estimated Rs. 1100 crore of debt repayment due during January. While the company has made some progress on its asset sales and fundraising from other sources, the quantum and timing of these remain uncertain, increasing the risk of delays in servicing its debt obligations in a timely manner.

"The rating downgrades also reflect the rapidly deteriorating real estate sector and the likely impact on Unitech's operating performance. It anticipates that operating performance in 2009 will continue to be weak due to the significant slowdown in demand for properties. Fitch will continue to monitor the company's financial and operating prospects, as well as its liquidity position," as said in an official statement. Fitch has also put Unitech on the watchlist for further downgrading in case it fails to service the large payments falling due in January.

Meanwhile, Unitech's board has approved the management's proposal to raise Rs 5,000 crore through debt and equity issues in the company's EGM on January 19. Sanjay Chandra, Unitech managing director, was reported to have said that the proposal was just an enabling provision. "The company could raise these resources through private placement, public issues on overseas stock exchanges, non convertible bonds, foreign currency convertible bonds or a combination of these," quoted Chandra. He, however, declined to share specific details.

Ironically, Unitech's troubles also began when the RBI started tightening lending norms for the real estate sector towards the end of 2007. Significantly, the Indian realty was one of the top-performing sectors during the recent economic boom as property prices across all segments went skyrocketing on spurt in demand due to increased economic activities. The low interest rates, easy availability of loans and strong foreign investment inflows further helped to fuel the property market boom. Carried away by the bullish sentiment, Unitech Ltd went on a borrowing spree to support its growth plans.

Meanwhile, a bubble was building in the property market. The government woke up to it late in 2007. But by that time, the bubble had already taken on dangerous proportions. It was too late to secure a soft landing for the overheated property market. When the RBI put the brakes on lending to the realty sector, Unitech was caught unawares.

Later, rising interest rates on home loans forced buyers to postpone plans. Besides, the big retail chains, the segment whose requirement of commercial space was a key factor in fueling the property market boom, also started cutting back their ambitious expansion plans on emerging signs of slowdown in the wider economy. This has created a huge supply side glut.

The government had asked the RBI to relax NPA norms for the realty sector on the calculation that developers would use this breathing space to liquidate their piling up stocks for repaying loans. However, despite benefiting from the RBI's loan restructuring programmes for the realty sector, most of the developers are sitting on their excess stocks in the desperate hope of a turnaround in the market, though some new projects are on hold due to fund shortages. And that is the reason why the market is betting on the opposite possibility of market correction.

Industry analysts say that the current slowdown in the domestic real estate market, stratospheric property prices and high interest rates have adversely impacted the liquidity profiles of real estate companies. And banks' continued risk-aversion has further compounded financial woes of the real estate players.

Over the past one year, demand for real estate has declined significantly in almost all the major markets in the country, with the economy slowing down and interest rates on home loans ruling high. Since this came after a boom period of four years which saw home prices chart a steep rise in all markets, the pain is acute. Currently, while property developers are still holding on to these elevated prices, potential home buyers are deferring plans in anticipation of a price correction.

As for commercial space, demand for the same has also been affected by the current slowdown in the economy and the global meltdown in the stock markets. Until recently, the demand for commercial space was being driven largely by IT, IT-enabled services and the financial services sectors. But in view of the economic slump, a slowdown in the growth of outsourcing services is anticipated, which in turn would impact the expansion plans of the IT/ITES sector.

Faced with a tight liquidity situation and a dip in profits, financial sector companies too have pruned their growth plans. But on the other hand, there is a surplus on the supply side. The liquidity problem for commercial properties is especially grave because developers are required to incur construction expenditure upfront, while payments from tenants and buyers they receive are mostly staggered, unlike in the case of residential projects where construction is partly funded out of customer advances.