Real Estate Developers On the Debt Bed - Sobha Developers Situation?

Real estate firms may be opting for loan rescheduling for some breathing space, but additional interest rate is only adding to the stress.

The real estate sector, which received a shot in the arm in the form of debt rescheduling package, is unlikely to get the full benefit as the package comes with several riders.

While rescheduling helps realty firms realign the payment tenure, it comes with an additional burden of 1-2 per cent interest, more collaterals and pledging of receivables. Bankers, taking into account the risk involved in rescheduling loans for real estate sector, raise interest rate. Confirming the move, a senior official of HDFC said, without wanting to be named. “When extending the time, banks can levy extra interest rate to compensate for the additional risk they take in restructuring accounts.”

However, additional interest rates can put severe strain on real estate companies as they had taken loans at high rates in the past. Levying extra interest would mean additional pressure on the troubled companies. T Y Prabhu, executive director of Union Bank of India says, “The idea of restructuring is to provide respite to the beleaguered companies. Increasing the interest rate only adds to the stress. Staggering of repayment is a better option.”

Until last year, builders and developers went on an overdrive to acquire land and launch projects, borrowing heavily for the purpose. However, the global slowdown has brought about a reversal of fortune for the once-booming realty sector, which is now saddled with liquidity crunch and falling property values, forcing companies to request banks to re-schedule loans.

Bangalore-based Sobha Developers, New Delhi-based Unitech and Mumbai-based HDIL have requested for rescheduling of some of their debt. These companies are not willing to comment on the rates at which they had borrowed money. However, according to a research report compiled by Credit Suisse in January, quoting NSDL data: “Sobha and Unitech borrowed at 19-30 per cent. Also, average borrowing for property companies was 200-300 basis points higher than most other sectors during the same period, indicating the higher risk attached by lenders to the sector.”

The report further added: “Sobha borrowed funds at 24-30 per cent for short periods of 1-2 months in October-November 2008. Further, it also appears that Sobha defaulted on some of the repayments during this time. Unitech borrowed at 19 per cent in November 2008.” The present rate of interest on commercial loans for real estate companies is 14-16 per cent. Banks reassess cash flows and viability of a project while restructuring and give preference to projects that are nearing completion. S Ananthakrishnan, executive director of IDBI Bank said, “As per the restructuring norms, the net present value (NPV) of principal and interest over the term of the loan cannot be diluted.” He also said that “to compensate for any such dilution, interest rate would need to be appropriately increased if the duration of repayment has to be extended to protect the NPV.”

Companies such as Sobha and Unitech are looking at easing their monthly quarterly obligations towards servicing debts.

“Real estate companies want the period of loan to be extended by converting short-term liability into long-term debt. Though it may result in higher rate of interest, a builder would be happy so long as his monthly obligation is reduced,” said Shuva Mandal, managing partner of Fox Mandal and Little, a law firm that specialises in real estate projects.

“If a developer furnishes more collaterals, then the interest rate is kept unchanged. Otherwise, additional interest burden of around 1-2 per cent is levied. We have been involved in 2-3 such instances in the last 45 days,” said Ameet Hariani, managing partner of Mumbai-based Hariani & Co, another law firm.

R Nagaraju, general manager for corporate planning and strategy at Unitech, said, “Interest rates are linked to prime lending rate (PLR).” He refused to comment specifically on additional interest burden because of loan rescheduling. Unitech had earlier revealed that the company had a debt of around Rs 8,000 crore, of which it had to pay Rs 1,100 by March 31 to various banks as opting for loan extension could give some breathing space. Besides Unitech and HDIL, another Mumbai-based real estate company is in the process of rescheduling non-convertible debentures of around Rs 1,275 crore that are due for payment starting April 2009.

S Baaskaran, chief financial officer of Sobha Developers, said, “We do not know about other players, but for us there is no additional burden. It depends upon the project completion and the revised cash flow of the company.”