REALTORS MAKE IT A PRIVATE AFFAIR

REALTORS MAKE IT A PRIVATE AFFAIR
The Economic Times, February 08, 2009, Page 1

Lenders being offered larger stakes in projects for bailing out promoters

Raja Awasthi & Anand Rawani NEW DELHI

THE much-vilified loan shark, once the staple of movies and theatre, is now donning angel wings to save developers from the swamp that institutional lenders abandoned them in.

A string of all-cash deals are happening today in the realty sector with private financiers — plain-vanilla money lenders, relatives or business associates — pitching in to bail out companies struggling to raise money for projects they are committed to, say developers and consultants that SundayET spoke to.

In return, these lenders are being offered nearly double the stake in projects than what was being given till a year ago.

SundayET is aware of at least one project where, for a cash loan of Rs 100 crore, the developer pledged the entire project, which is currently valued at Rs 150 crore.

“Private financiers are getting higher stakes in projects because sales and pre-sales have slowed down and many projects are languishing at the construction stage. Developers used to finance their projects through presales, which is currently not an option. Liquidity pressures are mounting and developers are choosing to dilute higher equity stake to obtain the required execution capital,” says Shobhit Agarwal, joint MD (capital markets), Jones Lang LaSalle Meghraj.

SundayET spoke to officials of at least two banks and a private equity company, which confirmed that almost all the major realty companies in the country are seeking cash from private financiers, even individual lenders, in return promising them a return of 50-70%.

Says Sandeep Singh, executive director (investment services), Cushman & Wakefield: “Given the double whammy of reduced sales and liquidity crunch on bank debt side, many developers currently are facing a severe cash crunch. Hence, private financiers from the local, unorganised markets are currently able to get sweeter-thanever deals from the developers.”

Even publicly-listed realty companies have picked up debt to the tune of Rs 4,000 crore from private financiers in the last few months, said an industry player who didn’t want to be identified.

In October last, SundayET had reported that liquidity concerns were tightening the screws on real estate developers and many of them were picking up money at 40-48% (interest per annum) from the market. This was bound to happen as private equity deals had disappeared from the market and their stocks were hitting 52-week lows on Dalal Street.

According to a senior bank official, who did not want to be identified, banks are very reluctant to give loans to real estate players. “Since we are expecting a correction in real estate prices, it is necessary to keep a cushion and ask for a higher collateral,” he said.

Says Amitabh Guha, ex-joint MD of SBI: “Additional collateral asked for by commercial banks can be attributed to management of the loan sanctioned and increased risk for lending to real estate sector due to slow down in the economy.”