With their back to the wall – Real Estate Developers

If you are one of the numerous buyers who are holding up their negotiations for finalizing property, then you may be in for some disappointment. Let me try to answer some probable questions you may have on the real-estate prices for the few months ahead.

But, before that, here is why the developers would be hard-pressed to drop rates.

Cost of Debt: Almost all realty companies are now reeling under the cost of debt. According to one report in Economic Times yesterday, the country’s top 11 listed real estate companies have a combined net debt of over Rs. 38,500 crores. The cost of debt to these real estate companies, range from 12-15% on an average. The interest rates have been revised 12 times in the last 18 months. With Interest rates again being revised by 25 bps by RBI, cash flow from operations (bookings and installments) might just be insufficient for the builders to cover interest and principal repayments.

Most of the builders have been reducing the outstanding debts in the last few months. However, any expected reductions in the interest payable have been diluted due to increase in the interest rates. Alternative sources of funding through market funding however are limited only to builders with favorable debt: equity ratio – an unlikely situation for most developers. For those who have that, the sailing is still not smooth. For instance, DLF’s net debt has not changed in the last 12 months despite having repaid higher cost debt with QIP. As per Dinesh Gupta, AVP Ansal API, at least 10-15% of their interest outgo was on account of interest rate hike (ET).

At this stage, options with builders are very limited. Sell off inventory through reduction of prices – understandably a double-edged sword and therefore will not find too many takers. The other option is to sell off their non-core assets. For those who have this option, the time-lines are stretchable in terms of disposition and returns. This will prevent any sliding of prices in the short run. Gains if any will be quickly re-absorbed by builders to meet cost over-runs in the ongoing projects, debt-repayments and acquisition of new land-banks or JVs. Very few of the builders today would have the third option of reducing their interest charges by debt repayment through internal accruals -Unitech and Sobha Developers being such exceptions. 

Is there a likelihood that prices will drop down in the following months?

Based on my discussions with a number of developers, both large and small, the prices will remain fairly range-bound with little or negligible bargaining possible.

What about festive season discounts?

Festive discounts are generally open with a small window and limited range of discount. If you are in the market, you might want to explore the possibility of beating the crowd, and talk to the builder ahead of the people lining up outside his office. If the developer’s discount scheme is successful, he is unlikely to accommodate any requests / negotiations for further discounts.