Every developer's top priority will be liquidity generation: Sharad Mittal

Motilal Oswal Real Estate, part of Motilal Oswal Private Equity, recently raised Rs 1150 crore for its fourth real estate fund. Its director and chief executive Sharad Mittal gives his take on the fund manager’s views on the impact of the lockdown on real estate and its investment strategy going forward.

Do you think the measures announced by the RBI for NBFCs will ease liquidity challenges of developers?

Repo rates are at a 16 year low and this can bring the much needed stimulus to the sector, both at the retail and wholesale levels, if banks pass on the benefit to borrowers. The RBI recently announced a refinance facility of Rs 50,000 crore, of this Rs 10,000 crore will be made available to NHB at the repo rate. While the funding needs of the sector are significantly higher, this will certainly help in easing some challenges in the sector. Previously, for reasons beyond the control of developers, banks allowed developers a delay of one year in commencing operations without restructuring the loan. In the recent announcement, an additional one year period has been provided for the same and it has been made applicable to loans provided by NBFCs, too. This is a positive move and will help several developers and financial institutions.

How will the whole issue delay recovery in residential real estate and how far will it delay the recovery?

While the commencement of construction will bring some relief to the sector, it may take at least three to four months before this activity can be resumed at 100 per cent pre-Covid capacity. With demand being muted for at least the next six months, developers will face severe cashflow challenges which could slow down the pace of construction further. This could lead to projects being delayed by at least four to six months and depending on the pace of recovery of the entire economy, this could extend up to 9 to 12 months, too. Developers who have allowed their labour to reverse migrate to their hometowns may face a significantly bigger challenge and they may witness project delays of as high as 15 to 18 months.

Do you agree that prices will crash by 20 per cent?

After the lockdown, every developer’s top priority would be to generate adequate liquidity to manage business activity and cash flows during the ensuing months. Developers will focus on selling existing completed stock and completing under construction projects to generate cashflows. This may cause several developers to reduce prices, however, we believe that the extent of price reduction would be a function of various factors such as 1) leverage levels of the developer; 2) supply in the micro-market; 3) type of project – luxury, mid-income, and affordable. Highly leveraged markets such as Mumbai and NCR are likely to witness further price reductions, especially in micro-markets which have a high supply of completed inventory. Other cities may witness relatively lesser reduction in prices. Luxury projects will face steep price reductions across the country.

What kind of liquidity challenges will the whole issue pose for developers?

With construction and sales activity having come to a complete halt and with expected project delays of at least 4 to 6 months, there is a huge cashflow pressure on all real estate developers. In the absence of new sales or existing sales collections, highly leveraged developers run the risk of reaching a negative cashflow situation over the next few months. The three month moratorium offered by the RBI will release the cash flow pressure for the time being however, it will exacerbate the situation in the following quarter. At this point in time, every developer is focusing on two things: a) Prioritize costs and manage cashflows during the lock-down and b) Devise a strategy to be executed once the lockdown is lifted. Commencing construction on existing sites and increasing collections will be imperative to generating liquidity for the developers. Developers which are first-to-act will have a significant advantage over others to recover from this crisis.

Will MORE go back to the drawing table in terms of investments strategy?

We closed our fourth and largest fund of Rs 1,150 crore recently. Majority of this fund was raised in the post IL&FS / NBFC crisis period. We have adequate dry powder over the next several months to make new investments. However, we will maintain a cautious approach in committing to new investments. At this point in time, our priority would be to focus on managing our existing portfolio.

Will limited partners commit money for the new funds in the short and medium term?

As we have recently raised a fund, we will not be looking at new commitments at least over the next 12 months. We have raised this fund during one of the toughest periods for Indian real estate. Our consistent strategy of partnering with large well managed developers in mid-income/affordable projects in the top 6 cities has augured well for our growth. Due to the COVID outbreak, we believe that the general demand for real estate will be muted in the short-term however, it will be strong in the long-term as investors increase their portfolio allocation towards real assets which are less volatile compared to public equities.