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With liquidity tight, firms resort to high-cost borrowing, accept tough conditions to raise funds.
For developers who came out of a prolonged slowdown of 2008-09, the fund raising spree could be dangerous, say consultants.
Despite roll overs and restructuring of loans, developers are staring at huge debt. By government estimates, they have piled up debt of Rs 75,000 crore (Rs 750 billion) and need to pay Rs 25,000 crore (Rs 250 billion) in interest and principal during the current financial year.
During 2008-09, considered the worst in several years, the top 10 developers had loans worth over Rs 10,000 crore (Rs 100 billion) restructured.
Most of the debt was restructured by public sector banks, after the Reserve Bank of India provided a special dispensation for companies facing cash flow problems.
"In most cases where there was a moratorium, the normal repayment schedule has kicked in from April 2010,'' says Pranay Vakil, chairman of Knight Frank India, an international property consultant. Adds Amit Goenka, national director, capital transactions, at Knight Frank: "Not all developers were able to restructure or rollover their debt.
A lot of developers are resorting to mezzanine or quasi debt to reduce their gearing, as Reserve Bank of India has ruled out further restructuring."
Goenka says since developers in cities such as Mumbai make gross margins of 60 to 100 per cent, even borrowing at 18 to 20 per cent is manageable for them.
A senior executive with a foreign bank said lenders are still uncomfortable offering loans to the real estate sector, since a lot of projets are on hold and the gearing continues to be high.
As a result, he said, even the top-rated real estate borrower is accessing funds at 12 per cent a year.
And, dwindling home sales have returned. According to property companies and consultants, home sales have fallen by 10-20 per cent since the quarter ended December, as prices have shot up significantly in cities such as Mumbai and the National Capital Region in and around Delhi.
"Unlike earlier, sales have shifted towards the end of the construction.
"Working capital which would have been met through sales have to be met through borrowing now," says Pujit Aggarwal, managing director and chief executive of Orbit Corporation, whose promoters recently raised Rs 150 crore (Rs 1.5 billion) from financial institutions.
Adds Ambar Maheshwari, director, investments, at property consultancy DTZ: "Servicing debt will be very high, as demand is not as high as it is perceived to be.
Developers are stretched for liquidity as sales have come down and carrying cost of land is high. They are going to be stretched further if the current situation continues," says Maheshwari.
The initial public offers much resorted to by realtors during the last financial year are also in limbo, given the volatality in markets and poor performance of recently concluded realty public offers.
A dozen realty companies are still planning to raise nearly Rs 17,000 crore (Rs 170 billion) from capital markets and have filed for doing so with capital markets regulator, Sebi.
At least half of them, such as Lodha, Emaar MGF and Nitesh Estates, have Sebi approval but haven't announced issue dates.
"It is very difficult to get anchor investors for the IPOs now and institutional investors do not agree with the kind of valuations projected by developers,'' says Goenka of Knight Frank.
Even listed developers are pledging their shares to fund their projects. Many promoter entities of realty companies have pledged all their holdings to raise funds, data from stock exchanges show.
Domestic private equity gets aggressive
Amid the liquidity crunch, domestic private equity has become aggressive, signing structured deals with developers.
"Earlier, developers used to call the shots but now things have changed,'' says Ramesh Jogani, chief executive and managing director of Indiareit Fund Advisors, promoted by the Ajay Piramal Group.
PE players are putting stringent conditions for developers wherein, apart from a fixed coupon rate of 15 per cent, most deals have a 'waterfall' clause of 15 per cent, wherein they get the first right on revenues generated from a project. So, effectively, developers are giving 30 per cent returns to investors.
