In recent weeks, Unitech has raised Rs 1,621 crore through a qualified institutional placement (QIP) aimed at easing the high debt burden. This has led to a 13 per cent post-issue dilution in the promoters’ stake to 51 per cent. This also represents a valuation of Rs 12,470 crore, 85 per cent down from its peak valuation of over Rs 85,000 crore in January. However, despite the funding, Unitech failed to complete its repayment of Rs 500 crore to mutual funds that was due on 19 April. Likewise, its target of raising Rs 1,000 crore from pre-sales seems far-fetched as it will have to book 10,000 flats costing an average Rs 50 lakh each to reach its target. Attempts to get responses from Unitech, DLF and Parsvnath by Bw drew a blank.

All figures in sq. ft. MMR: Mumbai Metropolitan Region; NCR: National Capital Region Source: Liases Foras

DLF presents a better picture but a closer examination shows the company may also be slipping into a debt quagmire. Loans on its books have risen 28 per cent to Rs 15,777 crore in FY09 from Rs 12,277 crore in FY08. Much of these funds have been used to acquire expensive land such as the 17.5-acre Mumbai Textile Mills in 2005 for Rs 702 crore. Also in Delhi, DLF purchased the 38-acre DCM Sriram Mills property in August 2007 for a whopping Rs 1,675 crore. The company also has outstanding payment for land acquisitions to the tune of Rs 5,962 crore. On the other hand, its sales numbers are on a downward trajectory — from Rs 2,981 crore and Rs 2,527 crore in the first two quarters of FY09 to Rs 790 crore and Rs 56 crore in the third and fourth quarters, respectively. The company, though, has managed to raise and restructure some debt. It had raised over Rs 3,000 crore from a consortium of banks. It is also attempting to raise Rs 1,000 crore from the sale of around 50 acres of prime plots in Mumbai, Bangalore, Lucknow and Gurgaon.

In the realty market, the relationship between DLF and DAL (DLF Assets Limited), the privately promoted company of DLF chairman K.P. Singh, is something of an enigma. Much of the sales booked by DLF are purchased by DAL, but little is known of how much DAL has finally offloaded to end-users. Sales to DAL form an important part of DLF’s balance-sheet with DAL contributing 43.5 per cent to DLF’s revenues and 35 per cent to the company’s profit before tax for the October-December 2008. However, analysts say the large receivables from DAL are a big concern the company and its promoters will have to address.

HDIL, too, faces the problem of mounting debt. From Rs 3,100 crore at the end of FY08, HDIL’s debt is now touching Rs 4,300 crore, of which about Rs 3,000 crore has been borrowed for the Mumbai airport rehab project. HDIL got itself a breather in March this year by rolling over Rs 2,500 crore of its maturing debt. But it is doubtful whether its current cash flows will meet the additional interest burden.

Delhi-based Parsvnath Developers is a good example of the host of over-leveraged realty companies that could turn turtle. Raising about Rs 1,000 crore from its IPO, Parsvnath locked up most of this by successfully bidding for a 123-acre housing plot at Chandigarh for Rs 821 crore in June 2006. The project has stalled and Rs 517 crore has been frozen by Parsvnath’s JV partner, the Chandigarh Housing Board. Then, in 2007, it bid for a seven-acre BEST bus depot land in Mumbai’s Kurla suburb, and announced a Rs 620-crore commercial and housing project. The project is yet to see the light of day. Today, it has virtually shut shop in Mumbai and employees have not been paid for over eight months.

Delhi-based Omaxe has over Rs 1,500 crore debt on its books. It has rolled over Rs 600 crore for a year that was due in September this year, but with sales of just Rs 735 crore for the first nine months of the current fiscal, can it meet its loan commitments? With housing and commercial property not selling, Omaxe promoter Rohtas Goel has announced a business plan to develop airstrips and jails in Uttar Pradesh!

“Those who expanded exponentially in the 2006-08 period on the back of high value purchases will find it difficult to survive,” says Shroff. “The best bet for them is to exit these undeveloped or incomplete projects at the earliest.”

Another form of debt that has not yet found its way into analysts’ reports is the money builders owe to their contractors. An investment banker says, “It could collectively be as large as the amount owed to banks and FIs.”

Regulation Needed
The real estate sector is amongst the largest revenue generators, with $72 billion in 2008 compared to IT/ITES’s $64 billion and telecom’s $31 billion. Yet, it is the most unregulated sector as far as the consumer is concerned. Funds raised for a particular project are diverted to complete other projects or square a maturing loan. Delivery schedules are seldom met and there is no way that errant builders can be penalised.

“Realty firms are like banks. They hold consumers’ money in trust; but when they violate that, there is no remedy,” says an investment banker. “In China, when private builders went out of control on delivery schedules, the state enforced regulation allowing bookings only after construction reaches the first-floor stage.”

Writes Shaleen Garg on the website Gurgaonscoop.com: “I would like to connect with fellow owners in ‘Raheja Atlantis’ who are suffering… Possession is delayed for over two years. We have paid up to 95 per cent of the price long time back. Even if the builder agrees to pay us Rs 5 psf per month, the penalty would amount to only 2.8 per cent interest on the capital deployed.”

Till the government brings in regulation to penalise such defaults, consumers such as Garg will continue to suffer.

gurbir dot singh at abp dot in

(Businessworld Issue Dated 12-18 May 2009)