New real estate bill is a bitter pill the industry needs for long term cure
most of the builder's money will get blocked till the project is complete and cannot be used to buy additional land for future projects or service earlier debt
Jun 20, 2013
Source : The Economic Times
 
 
MUMBAI: The proposed real estate bill, if implemented, will hamper cash flows and escalate the cost of capital of realty firms, besides limiting overall growth of the industry.

Of all the proposals, the most negative for the developer is the one that says the builder will have to set aside 70% of the payment from the buyer to be used only for that project. This means, most of the builder's money will get blocked till the project is complete and cannot be used to buy additional land for future projects or service earlier debt.

If the builder wants to invest in additional land, he will have to borrow money. The consequence of this could be fewer project launches and lesser projects in the pipeline, limiting growth.

Another proposal says the builder will not be allowed to sell or even advertise the projects until all the requisite clearances are received, which means there would be no pre-launches. This will delay the recovery of land cost, which was earlier 1-1.5 years. In other words, return on investments will be lower.

Who will be Hit & Who will Gain?

The bill will impact different companies differently. The immediate impact of this will be on companies looking at using the cash from upcoming projects to finish incomplete projects as well as to service their debt. These will be companies with high debt and a lower cash balance. More than 75% of companies fit into this category.

Among the listed companies whose financials are readily available, Unitech, HDIL, Hubtown and Orbit Corp fit this bill. Most of these companies are cash strapped with high debts, and in case the bill is passed, these companies will be in bigger trouble.

Considering the bill could slow down cash flows, some of the highly-leveraged companies — listed as well as unlisted — may be pushed to the brink of bankruptcy.

However, companies such as Oberoi Realty and South-based Sobha Developers and Prestige Estate, which have strong cash flows, will be not impacted. In fact, these companies could be indirect gainers as the weakness of one can be the strength of the other.

They will face limited competition from distressed and smaller players. For instance, cash-rich companies that have been hunting for land assets at good prices will get better prices as there will be fewer bidders for land assets. Also, lower inventory due to a drop in the number of projects from financially weaker players could boost demand for projects of stronger companies.

Long-Term Advantages

In the long term, this will benefit all the stakeholders — investors, developers, buyers and the government. Having a regulator will mean a more disciplined industry, timely delivery of projects and better governance with greater transparency.

This will help attract more investors at the project level. Further, creation of an escrow account will lower the risk for lenders, which will give realty firms access to low-interest debt. Most importantly, all these will keep prices under check. Spiralling of prices through creating additional demand for land by cross-collateralising and routing funds from one project to another will not happen.

We may see more developers preferring to partner with landowners or giving them a stake in the project as against snapping up land banks by over-leveraging. One possibility is that banks could start lending to builders against future receivables from the land they are interested in purchasing as against the current practice of lending against existing assets. However, this will increase the risks for banks.

 

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