Realtors desperate for funds, seek to borrow at higher rates
Moneylife Digital Team 27 May 2011

As the sector chokes, borrowing rates are skyrocketing; but housing prices continue to remain unaffordable

The real estate sector seems to be getting desperate with a shortage of funds climbing to alarming levels. Now, several small and medium-size developers are hoping to raise money by selling risky non-convertible debentures (NCDs), much of it at an astonishingly high coupon rate of 19%. But with the big builders continuing to hold on to their housing stock, there appears to be little chance of relief for the sector.

Lily Realty, one of the companies seeking funds, is planning to raise about Rs250 crore through unlisted NCDs to fund its projects in Mumbai and Bangalore. The higher coupon rate, which is similar to the interest payable on bonds, is 19% per annum, paid quarterly. The projects are to be completed within 2-5 years. The minimum investment amount is Rs1 crore.

Sources say Lily is not the only realty company and many medium and small developers are planning to take this route. "The RBI has placed so many restrictions on fund raising and investors are opting out of the realty sector as the returns have been poor. So many developers who are not so big are opting for alternative means to raise money. They are offering NCDs in lieu of high rates. It's a risky proposition, but they have to find ways to raise cash," one expert said.

However, considering the depressing phase the market is going through, it seems unlikely that people will rush for the NCDs. Pankaj Kapoor, managing director, Liases Foras, the realty research company, said, "The market is in desperate need of cash and these are alternative ways of raising money. I don't think many people will fall for such things as NCDs, which are unlisted and cannot be sold. They are very risky investments. Such schemes will do nothing for investors."

If this scheme does not work well it will only result in further worry for developers. For, not only are sources of funding decreasing, but high prices have put off customers. Prices have remained fixed in many parts of Mumbai for the last one year; they may not have increased, but they haven't come down either.

Many builders say the demand-supply gap is enormous and, hence, prices have shot up. This, however, does not explain why completed projects remain unsold. Sales are at a two-year low, according to Liases Foras, and an estimated 88,000 flats remain unsold in Mumbai. Many brokers and investors have their hands full with available spaces, but there are no buyers.

One analyst said, "If the prices don't come down, the situation will not change. The sector will be choked further. But since the big and influential developers are not willing to bring prices down, and they continue to hold their stocks, houses and properties will remain unaffordable, and there will be no off-take."

If this trend continues, it may mean trouble for the sector as well as customers. Rental values are already shooting up, and the salaried class is finding it difficult to pay for housing. If developers don't relent, their situation will worsen too.

Shama Zaidi
1 decade ago
it is rumoured that the obscene prices of housing in indian metros are due to the fact that upto 50% of the cost goes to paying bribes to the politicians, babus and police. could you let us know if this is credible?
mukesh parikh
1 decade ago
Size of the flame is biggest when candlestick is near it's end.
The same hold true for Mumbai real estate market.
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