Indian realty in 2011, bidding adieu

The Indian realty in 2011. Someone asked me to write a piece so this what I came up with...


The Indian real estate sector faced heavy headwinds from various corners throught out the year, making it a replica of 2008 when realty market went for a toss.

The trend that topped the chart for the entire year, was exponential drop in home sales across the country. The residential sector which had witnessed upturn in 2010, could not manage its dream run as the central bank, Reserve Bank of India (RBI) hiked interest rate thirteen times in last ten months . Coupled with rising borrowing cost, developer's held on to sales prices and in some cases increasing their rate cards, forcing home buyers away.

According to data released by real estate research firm, Liases Foras, for Mumbai, Delhi and Bangalore indicates that residential sales have dropped significantly in last six months in the metro cities.Home sales in Mumbai have lagged the most, as the city clocked in merely 17.4 mnsft at the end of the second quarter of this financial year as compared to 24.7 mnsft during the same period last year, a fall of 29.55 per cent. In Delhi, sales have plunged by 18.75 per cent, recording sales of 39.9 mnsft in April-September period this year as against 49.11 mn sft in the same period last year. Joining the bandwagon, is the information technology hub, Bangalore, which recorded sale of 16.1 mnsft in the first half of this financial year as compared to 20.6 mnsft in the corresponding period last year, a drop of 21.84 per cent in last six months.

Gulam Zia, National Director-Research and Advisory Services, at Knight Frank India, says, " There is no uncertainty that all across the country the residential sales numbers for last 2-3 months have come down. Volume dips in most of the cities like Ahmedabad, Chennai, Pune, Hyderabad has been in the range of 15-20 per cent, whereas Delhi has seen a fall of 20-25 per cent and Mumbai sales have plummeted by 60-70 per cent."

As home sales plummetted across the country, realtors were left with lower cash flow generation and more debt on their books. Except for Delhi based Unitech and Bangalore based Sobha developers all the realtors in the listed space have ended up adding more debt at the end of financial year 2011 as compared to financial year 2009. To add to it, the debt has been raised at higher interest cost , ranging between 12-14.5 per cent rates from banks. Non banking financial services (NBFC's) and private lenders have lent at 18-24 per cent on commercial borrowings.

To add to the woes of realty sector this year, the realty stocks were battered by both institutional and domestic investors with stocks hitting their 52-week low on the Bombay Stock Exchange (BSE). Infact, the combined price of shares of most of the players trades lesser than a combo meal at any fast food outlet.

Foreign Institutional Investors (FII's), the much coveted investors for realtors have started knocking off realty stock holdings since last six months.
Two realtors who have seen maximum sell off has been Mumbai based players, Indiabulls Real Estate (IBREL), which has major investments from Steel baron Lakshmi Niwas Mittal and Pujit Aggarwal promoted Orbit Corporation.
FIIs have also shown the door to other realtors like D B Realty, Housing Development and Infrastructure Ltd (HDIL), Sunteck Realty and Bangalore-based Nitesh Estates. As investors dumped these stocks and share prices continued their free fall, promoters of real estate majors Parsvnath Developers, Nitesh Estates, Orbit Corporation, Peninsula Land and Sunteck Realty increased their personal holding in the company. Though increasing in holding is considered to be a positive move, these realtors ended up pledging more shares to financial institutions.
For example, Pradeep Jain’s Parsvnath Developers has witnessed a continuous rise in promoter holding since March, from 67.66 per cent to 70.16 per cent at September-end. On the other hand Jain had pledged 86.47 per cent of his promoter share as of June. After raising his stake, the pledge came down to 71.24 per cent of his holdings at the end of September. Last month, he pledged an additional 16.4 per cent to various funds. Similarly, Rajeev Piramal, promoter of Peninsula Land, took his promoter holding to 55.72 per cent in June as compared to 55.18 per cent at March-end whereas his pledged shares more than doubled to 26.75 per cent at the end of September, against 13.35 per cent in June.
As investors gave a thumbs down to the developers, according to international property consultants, Jones Lang LaSalle India, private equity players infused close to USD 1.5 billion in calendar year 2011, nearly same to what it received during the down turn in calendar year 2009. International realty funds made an exit of 72 per cent in capital values and rest was made by domestic funds. But its realty promoters who have ended up buying the PE investor's stake, giving away close to USD 3 billion, 67 per cent of the total exits made this year.
As funds, investors and buyers shunned the realty space, developers across the country focussed more on monetisation of assets to raise money than depend on their core operations. DLF, the largest realtor according to market capitalisation, has already raised more than rs 1750 crore, by the end of this year from selling off its land assets. Following the same, is Mumbai based player, Housing Development and Infrastructure Limited (HDIL) which sold off its Navi Mumbai parcel for Rs 105 crore. Emaar MGF sold off its Kolkata property for close to Rs 120 crore. Even DB Realty, have put a few of its hotel assets on block too.
This year, realtors across the country have focussed their energies on consolidating their businesses and hiving off ancillaries where they can not scale up any further. Also some developers have resorted to only land or plotted sales to scale down its operational costs.

Fitch withdraws Unitech and Parsvnath from its rating coverage

The lack of information from realtors have grappled the realty industry since long, but now it has come to haunt the realtors themselves.

International agency, Fitch Ratings, has withdrawn ratings for various debt programmes for two north-based listed real estate companies, Unitech and Parsvnath Developers Ltd, from its coverage. It has also removed them from analytical coverage.

Fitch's report says, "the ratings have been withdrawn due to lack of adequate information. Fitch will no longer provide ratings or analytical coverage of Parsvnath and Unitech."

Parsvnath Developers Ltd was migrated to the 'non-monitoring' category on June 2 this year, whereas Unitech was moved to the same category in March. They were moved to the non-monitoring category due to unavailability of clear information on the debt programmes.
For Unitech, the rating agency has withdrawn its national long-term rating of 'Fitch B-(ind)nm'. The agency has also withdrawn Unitech's bank loan ratings on various instruments which includes "short term debt of Rs 1,100 crore which entailed Fitch A4(ind)nm. Rs500 crore, Rs 2,000 crore and Rs 1,900 crore long-term debt programmes with 'Fitch B-(ind)nm rating, Rs 100 crore short-term bank loan programme with a Fitch A4(ind)nm rating, and Rs 300 crore non-fund based bank limits with Fitch A4(ind)nm rating."
Unitech had mandated Fitch to rate a total of Rs 5,900 crore for its various debt instruments.

An official from Unitech who did not wish to be identified, said, "it is not a negative move for us, they have just withdrawn their rating. We had not sought their rating on the debt programmes and they had already moved us to the non monitoring category in March." There was no official comment from the developer.
Due to inadequate information, Fitch Ratings had put both the companies in the non-monitoring category. Once a company is put on non-monitoring, it falls under survelliance. After six months if adequate information is not available from the company, Fitch withdraws its rating on the company and its entire instruments which it was mandated to rate.

Analysts on the street who have Unitech under their coverage consider this move to be a negative development.
A research analyst with a domestic brokerage said, "It is a negative move because Fitch has clearly stated that they do not have enough information on the debt programmes. It is a concern why Unitech has not disclosed how the debt is being taken care of, how stressed are they keeping in mind that they have been paying off their debt in the last one year. Also the promoter pledging has slighlty gone up at the end of the September quarter. "
Parsvnath has been raising best part of its money through private equity route since last year, but hardly any analysts track the company.

The rating agency said in its release, "Fitch Ratings has withdrawn India-based Parsvnath Developers Limited's national long-term rating of 'Fitch B-(ind)nm'. Simultaneously, the agency has withdrawn the 'Fitch B-(ind)nm' rating on Parsvnath's long-term loans of Rs 200 crores and Rs 900 crores, and the 'Fitch A4(ind)nm' rating on its short-term loan of Rs 200 crores." It turns out to be a total debt burden of Rs 1300 crores.
As promoter and chairman of Parsvnath, Pradeep Jain, is travelling, the company declined to comment on the development.

Note: The copy was half published by my employer Business Standard Ltd.

FII's cutting down realty exposure

Foreign Institutional Investors (FII's), the much coveted investors for realtors have started knocking off realty stock holdings since last six months.
Two realtors who have seen maximum sell off has been Mumbai based players, Indiabulls Real Estate (IBREL), which has major investments from Steel baron Lakshmi Niwas Mittal and Pujit Aggarwal promoted Orbit Corporation.

At the end of March, 2011 FIIs held a 53.73 per cent stake in IBREL, which has fallen to 45.33 per cent in the September quarter of this financial year, a drop of 8.4 per cent. The heavy selling by institutional investors has battered the stock too .

The stock hit its new low since listing at Rs 60, down 5.06 per cent at the end of the day on the Bombay Stock Exchange (BSE).

FIIs have also shown the door to other realtors like D B Realty, Housing Development and Infrastructure Ltd (HDIL), Sunteck Realty and Bangalore-based Nitesh Estates.

The real estate sector has been grappling with interest rate hikes, slowdown in sales and an increase in debt burden of developers. Even though sales have dried up developers are not ready to cut prices and they are borrowing at a higher cost.

An analyst with a foreign brokerage who did not wish to be identified says, “Indiabulls Real Estate has failed to generate any cash flow earnings and most of its net asset value lies with its power venture where it will take time before any concrete results can be seen. The company has bought land parcels from National Textile Corporation (NTC) at very high prices where they are not able to capitalise. Even in its existing projects cash flow is a concern, and the sales slowdown in Mumbai is a negative sentiment.”

IBREL isn't the only case. Following the footsteps are fund managers who had bought stake in Orbit Corporation promoted by Pujit Agarwal.

Pujit Agarwal, managing director, of the luxury realty company said, “The realty market has been hit badly, FIIs have sold our shares but as I understand in the last two weeks FIIs have started re-investing. Our stocks have fallen down considerably but sales are slowly picking up now.”

The company's FII holding has fallen from 11.97 per cent in the March quarter to 6.73 per cent in the June quarter and stands at 2.26 per cent at the end of the September quarter, a fall of 9.71 per cent. Orbit's stock hit its 52-week low at Rs 26.05 per share at intraday, finally closing at Rs 26.40 down 1.12 per cent.

R Sridhar, group director, DB Realty, said, “I think the problem with the Indian market is that the FIIs are under a lot of pressure and they are trying to cut their exposure. But the shares at these prices are quite attractive and real estate is a long term story.”

DB Realty's promoters who are embroiled in the telecom 2G- scam, has seen a drop in FII holding from 5.46 per cent in March, 2011 to 4.54 per cent in September, 2011, a drop of 0.92 per cent.

Kamal Khetan, Managing Director of Sunteck Realty, indicated that institutional investors own close to 14 per cent stake.

The FII holding in the company has fallen from 6 per cent to 4.44 per cent, a drop of 1.56 per cent in the last six months.

The FII holding in Nitesh Estates has fallen to 21 per cent in the September quarter as compared to 23.07 per cent by March-end, a drop of 2.07 per cent.

An analyst from a domestic brokerage said, “Some funds had started selling IBREL shares in the open market, which has pulled the stock price to its new lows and we expect this to continue for sometime. Also the stock price of all the realty stocks have fallen to the same levels as it had hit when market was trading at 8000 points and at present we are trading at 16,065 points, if markets falter any further the funds will continue their heavy selling. This time around not only the Mumbai based players but Delhi based players will also bear the brunt.”

Real estate promoters increase their stake as share prices continue their freefall

Amidst a challenging business environment and falling share prices, promoters of real estate companies have shown faith in their businesses by increasing their shareholding by up to three per cent this financial year.

However, poor cash flows and high debt have made their lenders jittery. While some have raised the collateral requirement for existing loans, margin calls resulting from falling share prices have also led to additional pledges.

Real Estate majors Parsvnath Developers, Nitesh Estates, Orbit Corporation, Peninsula Land and Sunteck Realty are among the entities which witnessed promoters raising stake in the company over the past six months.

Pradeep Jain’s Parsvnath Developers has witnessed a continuous rise in promoter holding since March, from 67.66 per cent to 70.16 per cent at September-end. Rajeev Piramal, promoter of Peninsula Land, took his holding to 55.72 per cent in June as compared to 55.18 per cent at March-end.

Kamal Khetan, promoter of Sunteck, said, "We have been doing creeping acquisitions and our financial institutions’ holding is always around 14.5 per cent. The company's promoters hiked holding to over 70 per cent from around 67 per cent."

Pujit Aggarwal of Mumbai-based Orbit, who raised his holding from 46.99 per cent in June to 47.51 per cent in September, said: “We have been increasing our stake and are trying to bring down our share pledging. Though the stock has fallen significantly in the last one year, we are hoping things will improve from the next quarter. Even FIIs (foreign institutional investors) have started looking at us, so we are hopeful.”

Normally, buying back of shares from the open market is considered a positive indication. But, analysts are not very bullish, as a significant portion of these shares are marching to the financial institutions to meet additional margin requirements. Earlier, realty developers had to provide collateral worth three times the loan. Now, bankers are asking for collateral of up to five times against existing loans, say experts.

“Cash flows are drying up, while debt is on the rise for the sector. As stocks have plunged, triggering margin calls, promoters need to pledge more shares as collateral with the lenders,” said an analyst.

For example, Jain of Parsvnath had pledged 86.47 per cent of his promoter share as of June. After raising his stake, the pledge came down to 71.24 per cent of his holdings at the end of September.

Last month, he pledged an additional 16.4 per cent to various funds. Similarly, Piramal’s pledged shares more than doubled to 26.75 per cent at the end of September, against 13.35 per cent in June.

In Bangalore-based Nitesh Estates, too, while the promoters' stake rose from 43.64 per cent to 44.15 per cent in the September quarter, promoter Nitesh Shetty pledges had increased to 29.42 per cent of his holding by then.

The head of investment banking at a financial firm says, “Developers need to cut their debt and start selling their inventories. These developers are increasing stake just to pledge these against the old debt. A fresh loan is difficult for them. Unless they have a good relationship, bankers are unlikely to lend further.”

PLS Note- This story has been published by my employer Business Standard Ltd.