Realty lenders turn to white knights

L&T Realty, Godrej & Prestige see spurt in ventures with banks

Shrikant Joshi is one of those few chief executive officers (CEOs) from the real estate industry who can afford to smile at a time when the industry is going through distress.

“A number of proposals have exploded on us,” says the director and chief executive officer of L&T Realty, the developer that works under a joint venture (JV) with landowners. “Our deal pipeline has grown 10 times in the past two-three months as nobody is willing to pay for land,” Joshi says, with a grin, explaining that how the lenders of stressed projects are in talks with his company to ink a JV.

Lenders are looking for developers with strong brand and good track record so that they can sell the property despite the slowdown. Apart from L&T Realty, Godrej Properties and Prestige Estate Projects are also looking at such joint ventures.

Godrej Properties added 12.6 million square feet of new projects across Mumbai, Bengaluru and Pune in the quarter ended September, against 23 million square feet in the previous five quarters, as several mid-to-large sized developers are now offering high-quality land parcels and the entire portfolio for sale. “It is a big opportunity to expand,” said Pirojsha Godrej, chairman, Godrej Properties. “Markets are in a poor state which creates a lot of pull for other developers wanting to do JVs with us.”

The subsidiary of engineering behemoth L&T that started operations around six years ago has 14.1 million square feet of completed projects in residential, commercial and retail segments. In addition, it has projects of 66.7 million square feet in the pipeline, nearly half of which are residential.

According to real estate consultant Knight Frank, the launch of residential projects in the top eight cities has dipped by 41 per cent in the first six months of 2017, the lowest in seven years. More alarmingly, the value of stalled projects stood at an all-time high at Rs 1.27-lakh crore, according to an Ambit Capital report published last month. The stalling rate of projects is also at an all-time high of 13 per cent. Stressed real estate developers were looking for such JVs earlier. Now the lenders have become more proactive after the implementation of the Insolvency and Bankruptcy Code through the National Company Law Tribunal (NCLT) courts and the enactment of the Real Estate (Regulation and Development) Act (RERA).

“There is a further challenge for lenders who have financed real estate developers. Projects that began in the pre-RERA and pre-NCLT era now have to be compliant with both,” said Ritika Mankar Mukherjee, analyst at Ambit Capital.

For many developers, this is turning out to be a nightmare because they are not being able to deliver flats on time and they are not being able to honour their commitments to suppliers and financiers on a timely basis. As a result, they are being dragged to the courts repeatedly.

“In the face of impending legal action, lenders have to repeatedly refinance these loans to the developers. If they don't, the developer will be declared insolvent under the NCLT process (and thus become a non-performing asset on the lenders' balance sheets),” she said. Due to this compulsion, lenders are now looking for white knights.

Vinit Deo, chairman and managing-director, Posiview Consulting, a real-estate finance advisory firm, said some lenders were pushing developers whose projects have been stuck to strike workable deals (sale) with companies so that the track record can be maintained. For those with satisfactory records, Deo added, “Lenders are willing to give additional funds to finish the projects.”

SNAPSHOT

• The launch of residential projects in top eight cities has dipped by 41% in the first six months of 2017
• The value of the stalled projects stood at all-time high at Rs 1.27-lakh crore
• The stalling rate of total projects is also at all-time high of 13%
• For many developers this is turning out to be a nightmare because neither they are being able to deliver flats on time, nor they are being able to honour their commitments to their suppliers