Published & Updated as on - 2010-02-18

The Reserve Bank of India’s (RBI) recent move to discourage bank lending to the real estate sector may not have a clear cut impact on the ground, but the message is strong.

With the Indian central bank ruling out another round of restructuring of C those developers attempting to hold on to higher prices for their projects will have to revist their strategy, especially the highly-leveraged ones. RBI may want to prick any asset bubble in the making, but new launches may now take place only featuring developers pegging projects either at existing prices or at fairly reasonable rates.

However, the immediate impact of RBI’s decision would be on the utilisation of funds available with these companies. Developers such as DLF, HDIL, and Parsvnath, which have a huge debt pile, would be impacted. Though these players have raised funds through new project launches, asset monetisation and QIBs, analysts reckon that they would channel these funds towards debt repayment, although the primary aim is to utilise the funds for completing under-construction projects.

Earlier, many realty firms were using a part of these funds for servicing interest cost and then trying to opt for the second round of debt restructuring. As the loan restructuring typically is carried out by charging a lower rate of interest and for a longer tenure, most developers were repaying just the bare minimum. In the backdrop of the RBI move, developers may have to resort to either new borrowings or utilising existing available cash rather than ploughing it back into the business. Thus, an increase in cost of capital can’t be ruled out. The Street seems to have sensed it, for when the overall market was up 0.67%, the Realty index was down 1.2%, especially stocks of debt-laden realty firms.

High debt firms such as DLF, HDIL, and Parsvnath were amongst the top losers on bourses. A pull-down impact on their interest-coverage capacity is also possible. According to industry analysts, there could also be some short-term pressure on cash flows. In fact, as most realty firms have seen a pick-up in demand in old as well as new project launches, it will be the unlisted players who could feel the maximum impact on their liquidity, considering the volatility in the primary market.

Moreover, the response to the two recent realty IPOs where retail investors didn’t show much enthusiasm, may deter them from pricing their IPOs very aggressively. Selling a higher number of flats at lower prices may be the only recourse for many real estate firms.

Source:Economic Times 10/2/10