The mega real estate loan scam could delay the initial public offers of over half a dozen real estate developers because of poor investor sentiment, said bankers and analysts tracking the sector.
"It will be very difficult for real estate entities to raise money through IPOs at this juncture," said Gyan Mohan, executive vice president and head, investment banking, IDBI Capital Markets.
According to Prime Database, which tracks primary capital markets, eight real estate companies have got the final approval from the market regulator to launch IPOs. These include Raheja Universal, Lodha Developers, Lavasa Corporation and Kumar Urban Development. Together, they were looking to raise Rs 9,500 crore (Rs 95 billion).
"Though it has been said that this is not a systemic risk, investor sentiment has been impacted. The sector was anyway facing transparency issues," said Mohan.
The IPOs are crucial for these developers to repay debt. For instance, New Delhi-based BPTP was planning to use a fourth of the IPO proceeds of Rs 1,500 crore (Rs 15 billion) to lower debt.
"I do not think any property developer will bring out a public issue in the current financial year. Those who try IPOs and QIPs (qualified institutional placements) will have to undergo a lot of scrutiny and due diligence in the coming days," says Amit Goenka, national director, capital transactions, Knight Frank India.
Developers like Lodha agree. "The markets are still volatile and previous issues have not done very well. We may take a view in the new year," said Abhisheck Lodha, managing director of Lodha Developers.
The benchmark BSE Sensex has fallen 2.3 per cent, or 448 points, since November 19.
To tap elsewhere
Due to delay in raising funds through selling equity and from public sector banks, the cost of borrowing for real estate companies will rise and developers may have to borrow more from private banks, non-banking finance companies and private equity (PE) firms, bankers say.
At present, property developers borrow at between 10.5 per cent and 14 per cent, depending on their credit profile. This may rise by 50-100 basis points.
"Conditions are quite adverse for the real estate sector. In debt, the cost of funds is based on the perceived risk. The riskier the assets, the higher is the price. Even RBI has increased the risk weight for real estate loans," said a head of fixed-income capital markets at a foreign investment bank.
RBI increased the standard asset provisioning by commercial banks for teaser home loans from 0.4 per cent to two per cent, capped the loan-to-value ratio at 80 per cent and increased the risk weight on loans of more than Rs 75 lakh (Rs 7.5 million) to above 125 per cent in the November 2 monetary policy.
Goenka says though private lenders will increase rates, private equity firms cannot increase their return expectations from developers, as they've already been asking for 25 per cent returns.
"PE firms will get more credible opportunities and put more money in the sector," he adds.
However, some developers say funding from public banks will resume once the dust raised by the scam settles. "Banks cannot afford to not do business with property developers as they earn a good spread. Once things settle down, funding will continue as usual," said the chief financial officer of a Mumbai-based listed company.
