The demonetisation drive is likely to hit the interest repayment capacity of real estate funds, creating a 2008-like situation, when several faced a challenge in returning the capital and ended up with single-digit return, much lower than promised.
At present, these instruments are giving 14-26 per cent as coupon payment, done quarterly, half-yearly or annually. The problem will be acute for funds invested in residential projects in tier-2 and tier-3 cities, where cash transactions are higher. Real estate stocks have slid by four to 20 per cent since November 8.
Real estate non-convertible debentures (NCDs) finance developers through a structured debt instrument. Short-term loans are raised from investors and developers, in turn, give regular interest payout. There are presently about 50 realty funds in the market.
“NCDs are typically raised for residential projects and large projects can get impacted if cash flows are hit. NCD buyers are likely to see rescheduling of cash flows to them. Although there are unlikely to be full-blown defaults immediately, the pace of rescheduling of coupons and principal are likely to increase,” said Anubhav Srivastava, managing partner, Block Blue Capital Management.
According to Prateek Pant, co-founder and head of products & solutions, Sanctum Wealth Management, the impact will depend on the mandate of the fund, type of development risk the project is taking, its cover and type of fund structure (equity, debt or mezzanine). “Developers have to maintain a minimum security cover of two-three times the amount borrowed but this is inadequate if realty prices crash 20-25 per cent and there is a liquidity squeeze,” he said.
Demonetisaton, realty fund, NCD, Anubhav Srivastava
Realty funds have raised money at 16-26 per cent and these rates will become unsustainable, said experts. “It is unlikely that the investors and their advisors will accept a lower coupon unless the entire issue is replaced. Mostly, the repayment schedule changes, which will take care of the immediate problem. However, the issue of indebtedness and cash flow crunch will remain. I believe a sustainable interest rate is more in the range of 12-14 per cent,” said Srivastava.
Experts say significant sums are paid to contractors, suppliers and labourers through cash. Demonetisation will throttle this supply, especially in residential projects, already facing a slowdown. There are an estimated 700,000 vacant residential units in the top eight cities.
According to a recent survey by realty consultancy Knight Frank and business chamber Ficci, a little more than 60 per cent of respondents felt residential prices would remain the same or worsen by the end of the year. “We expect a slowing in sales and expect prices to correct 15-25 per cent over the next 12-18 months, primarily in residential projects,” said Pant.