'Unlisted Developers: The bigger black hole' : IDFC Securities Shock Report

According to IDFC Securities Ltd report, between October 2010 and September 2011, lending by banks and NBFCs (Non- Banking Financial Companies) to Indian real estate developers grew 14% to Rs.1.6 trillion (One trillion = One Lakh Crore) . Unlisted developers account for 62% of this sum and Banks lent Rs. 1.15 trillion

The report named, '' Unlisted Developers: The bigger black hole".  .

Mr. Nitin Agarwal and Mr. Vineet Chandak, Analysts, IDFC Securities Ltd said, “With the next 6-9 months expected to remain difficult for the Indian realty sector and a significant portion of debt due for repayment, defaults by some unlisted players are unavoidable“ .

Highlights of IDFC Report..!

# Developers, typically, get money from banks to finance projects at 12-14% interest rates and from NBFCs (Non-Bank Financial Companies) at 18-20%. About 30-35% of the funds a developer needs typically come from banks.

#  Banks and NBFCs stepped up lending to the Indian realty sector despite repeated statements of caution by the RBI (Reserve Bank of India) on the high risk of lending to the price and interest rate sensitive sector.

#  Given that operational cash flows of many developers are strained due to low sales, they could be forced to cut prices.

#  Predicting a much anticipated 10  to 25% correction in property prices in the near term to medium term.

# The implications of heavy borrowing by unlisted realty developers are multi fold

#  Of the incremental lending of about Rs. 20,000 crore between October 2010 and September 2011, 67% went to unlisted companies..

#  Some instances, banks have asked the unlisted borrowers for “almost twice the collateral because the sector risk profile has gone up.

# Most bankers agree that loans to unlisted developers can be riskier since the corporate governance standards of these firms are not satisfactory in many cases.

# Unlisted developers account for 62% of the Rs. 1.6 trillion in loans to real estate developers between October 2010 and September 2011.

# Growth in gross debt for the top 25 listed real estate companies largely remained unchanged between October 2010 and September 2011.

For DLF, the India's largest developer, however, net debt rose by about Rs. 1,000 crore in the quarter ended September to Rs. 22,519 crore, which the company said was due to delays in receiving payments from its sales of non-core assets.

#  Buckling to the pressure from equity investors, listed developers have sought to manage or reduce their debt - equity ratio by curbing aggressive land acquisitions, by raising equity or selling non-core assets, among other measures.

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