The implementation of the new real estate regulation along with the ongoing insolvency and bankruptcy proceedings by the National Company Law Tribunal (NCLT) against debt ridden builders are likely to push for sale of distressed assets, triggering a fall in land prices by February 2018, according to a report by brokerage firm Ambit Capital Pvt. Ltd. The report also indicates stress for non-banking finance companies (NBFC) and housing finance companies (HFCs) that have large exposure to developer loans.
The report, titled ‘Real Estate-Recovery is far away’, pointed out that limited availability of funding for real estate developers, inception of Real Estate (Regulation and Development ) Act and NCLT process are making developers hold off from launching new projects. Besides, with inventory piling up over the last three to four years, most developers are focused on offloading their current stock rather than launching new projects.
As per a 5 July report by property consultant Knight Frank, launches of residential projects in India’s top eight cities declined by 41% in the first six months of this year. “We expect land prices to fall from February 2018 as Insolvency Practitioners (IPs) liquidate the assets of bankrupt companies. As land prices fall, it is natural that real estate developers launch cheaper properties through 2019 and 2020,” said the report.
The failed auctions for prime plots in Mumbai and Oberoi Realty’s discounted land purchase in Thane from GlaxoSmithKline Pharmaceuticals (GSK) is proof of this dynamic, it said. In September, GSK sold around 60 acres land at Thane in Maharashtra to Oberoi Realty for around Rs555 crore. The transaction translates into Rs9 crore per acre. A decade ago, the same plot of land would have fetched double the amount, the report said.
“Thanks to the oversupply of flats in Thane and due to punitive sanctions imposed by RERA, no other developer had the means or the gumption to bid for this plot,” it said.
NCLT has started insolvency proceedings against Delhi based developers like Amrapali Infrastructure and Jaypee Infratech for failing to repay loans to banks. “Land prices have already started softening as land owners have become more realistic. Land owners and co-developers have understood the reality of the market and have started rationalising their expectations. Instead developers and land owners are opting for partnerships and more structured transaction in the form of area or revenue sharing,” said Vrushank Mehta, head of corporate strategy and land acquisition at Wadhwa Group, a Mumbai-based realty firm.
The report by Ambit also said that as a consequence of fall in land and property prices homeowners may start defaulting on their loans. “Homeowners who are repaying mortgages which are far bigger than the prevalent prices of their property could start defaulting on their mortgages,” the report stated, adding that NBFCs and HFCs with large developer loan portfolios may take a hit.
Harsha Patkar, senior analyst—financial institutions at India Ratings said that a slowdown in real estate was prevalent even during 2014 and that property prices have corrected during the current fiscal after the demonetization impact started to wear off.
“Stress on NBFCs and HFCs will depend on the kind of portfolio they have and the risk mitigation policies they follow. Lenders have ring-fenced the project cashflows as well as have a decent cash flows cover over assets depending on the project stage,” he said.
Ambit expects Godrej Properties and Sobha Developers to gain market share in the real estate business. It said that property market will see a consolidation and only those developers will survive who can manage their capital well and execute projects speedily.
