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It may be true that ‘when the going gets tough, the tough get going’, but this does not seem to hold true for the Indian real estate sector currently. The ongoing crisis in the non-banking financial company (NBFC) sector, after the default by IL&FS, has made things even more difficult for developers.
Following the banking system’s freeze on real estate funding, due to rising non-performing assets, NBFCs and housing finance companies (HFCs) were the sole source of funds for the cash-strapped developers. Now, however, NBFCs themselves are struggling and their loan disbursals to developers have slowed down significantly. A source of broad spectrum dismay and despair, the NBFC crisis needs to be resolved as soon as possible, or the real estate sector’s much-anticipated recovery will be postponed by a couple of quarters.
As a Credit Suisse report reiterates, NBFCs and HFCs have played a major role in credit supply in recent years, accounting for nearly 25-35 per cent of incremental overall credit. While bank credit growth in the last two years averaged at a mere seven per cent, strong 20 per cent-plus growth in NBFC credit, aided overall credit expansion beyond 10 per cent.
Impact of IL&FS default
What began as a singular event, with IL&FS failing to repay its commercial dues, has grown into a liquidity crisis for the entire NBFC spectrum. As an immediate aftermath, NBFCs’ stocks went into free fall and the top 15 NBFCs cumulatively lost over Rs 75,000 crores in just two initial trading sessions. To say that this rattled investors, would be a gross understatement and the government and regulators’ immediate efforts to rein in the panic, failed to curb the sell-off tidal wave. Since September 20, 2018, NBFC stocks have tumbled by more than 50 per cent for DHFL. The current NBFC crisis can have a cascading effect on the real estate sector’s growth forecasts, which were already nebulous, on the back of the liquidity crisis created by rising defaults and non-performing assets in banks.
Tightening by NBFCs and how it will affect developers and home buyers
The liquidity crisis plaguing NBFCs, is likely to hit stake sale and fund-raising plans for these lenders, in the near term. With real estate having a strong correlation to credit availability, it could be worse for already cash-starved developers. As per ANAROCK data, more than 5.75 lakh residential units are running behind schedule, across the top seven cities, since their launch in 2013 or earlier. The major factor contributing to this delay, is the liquidity crunch that developers are experiencing to the backdrop of tepid sales.
Despite residential sales gradually picking up q-o-q, they are nowhere near their peak levels.
With a substantial number of residential projects running behind schedule, the crisis could further exacerbate liquidity woes and impact project delivery timelines even more. Some NBFCs like Indiabulls also provide home loans to individual home buyers. With banks tightening their norms for lending to individual home buyers in recent times, NBFCs were seen as the best alternative. Therefore, the ongoing NBFC liquidity crunch will also impact home loan approvals and disbursements, inevitably reducing residential property demand in the short-to-mid-term.
Apart from weak residential sales, increasing input costs and promotion expenses, coupled with the high compliance costs, will result in decreased earnings before interest, tax, depreciation and amortisation margins.
NBFC crisis to increase the pace of consolidation in real estate
With most things being unequal in Indian real estate, the impact of this crisis will not be the same across the board. Many listed realty developers, such as Puravankara, DLF, Prestige Group, Oberoi Realty and Godrej Properties, have well-diversified portfolios, including commercial and retail. Many of these players have also reduced their debts and ventured into affordable or mid-income housing, where growth is currently the highest. In the highly competitive real estate business environment, these players may emerge stronger, as they are better-equipped to ride the storm and continue to deliver while others cannot. Large-scale consolidations are already ensuring that only the fittest will survive in the future and the NBFC crisis will hasten the process.
(The writer is MD and CEO, ANAROCK Capital)