Saturday, April 27, 2013

At the cusp of a great execution opportunity

The real estate sector in India has come off its peak two years ago and is currently being dragged down by a host of issues. For the sector to get back on the growth track, there’s much riding on how leading players such as DLF get their act together again.

For the last two years, the real estate sector in India – whose market size is expected to reach $90 billion by 2015 – has been witnessing slowing demand and inventory pile-up. The unsold inventory in residential real estate so far this year has been the highest in Delhi-NCR at 102,758 units, followed by the Mumbai metropolitan region at 90,512. Bangalore comes next with 46,596 units, and Pune follows with 40,734 units (PropEquity statistics). At the same time home loan interest rates have refused to come down and this has dampened sales even further. Growth in home-loans dropped to 12.1% for the year ended March 2012 from 16% in the last fiscal year.

Even the prospects of commercial property have dimmed severely. The drift is likely to continue for the next few quarters, with absorption of office space expected to drop by 10-15 % for 2012 due to lower demand from the IT/ITES sector. Demand from IT/ITES sector has dropped from 68% in 2005 to 35% at present due to increasing cost pressures faced by IT firms.

To make matters worse for the industry, most of its leading players are reeling under high debt. The cost of debt for most real estate companies is in the range of 12-15%, on the basis of which the combined interest burden itself on them is between Rs.40 billion and Rs. 50 billion. With home sales at abysmal lows, real estate companies are finding it difficult to deliver their projects or repay their growing debt on time.

Apparently, nearly half of the 930,000 under-construction residential units in the country, scheduled for delivery by 2013, are likely to be delayed by up to 18 months. Analysts say many of these delayed projects might be up for sale as developers will not be able to revive them due to shortage of funds and cost of debt servicing.

According to industry estimates, the combined debt of the country’s top 11 listed real estate companies stands at around Rs.350 billion. While many small and mid-sized Indian property developers face the risk of default, the big ones are trying to overcome the situation by delaying projects, discounting properties and even selling assets. Leading real estate player Unitech is selling land parcels to pare its debt, which stood at Rs.51.9 billion as of December 2011. It had a land bank of 605.4 million sq. ft. in

March 2008, but by December 2011, it had declined to about 304 million sq. ft. Another leading real estate firm, HDIL, which had a debt of Rs.41 billion as on December 31, 2011, recently sold a two-acre plot in Andheri, Mumbai, to the real estate arm of Adani Enterprises for Rs.9 billion.

Even the country’s largest real-estate company – DLF – which ranks #73 on this year’s B&E list of Most Profitable Companies, has been finding it extremely difficult to raise funds and reduce its mountainous debt of Rs.227.58 billion as of end of December 2011. Its debt burden rose to around Rs.200 billion on the back of a tenfold rise in its interest costs since 2008. The interest outgo in the fourth quarter of FY2012 increased to Rs.6.03 billion from Rs.4.55 billion in the year-ago period. The company, as a result of its huge costs, has not been able to post an increase in quarterly profits over the last two years, and its sales growth has also fallen over the last four quarters. For the quarter ended March 2012, DLF posted a 39% drop in consolidated net profit at Rs.2.11 billion. Similarly, consolidated total income dipped 4% to Rs.27.47 billion as against Rs.28.70 billion in January-March 2011. To ease the pressure on its books the company has set a target of raising Rs.60 billion to Rs.70 billion from divesting non-core assets such as hotels and IT parks by the end of financial year 2012-13.


Source : IIPM Editorial, 2013.
An Initiative of IIPM, Malay Chaudhuri
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