Real Estate Developers Are Faced With Severe Liquidity Crunch

As a result of rising interest rates on home loans and reluctance on the part of developers to reduce prices on their projects, demand for real estate in India has slowed significantly, leading to significantly lower cash generation for real estate companies. Developers are now faced with a severe liquidity crunch, as the worsening macro environment coupled with the increased risk perception of the sector has made fundraising extremely challenging.

Real estate developers have relied on short-term debt (40-50% of total debt) for financing land purchases and funding construction of leased assets. Many companies have reported that borrowing costs have increased by 250-300 bp over the past few months, the bigger issue has been availability of financing – news articles and market stories suggest that a number of banks and mutual funds have stopped lending to real estate developers fearing defaults. Given slowing sales and weak cash-generation, it is estimated that some developers will be hard pressed to meet their repayment commitments.

Another issue is monies raised by some of the promoters of these real estate companies by pledging their shareholding – the impact of which is extremely difficult to assess given the lack of transparency in such transactions, which increases the perceived risk of companies.