Rs 800 bn stuck in stalled realty projects; NBFC concerns overdone: Citi

The study is based on a top-down analysis using the area in projects, selling price of projects, construction status, assumed construction costs and land cost

At a time when most real estate stocks have been on fire at the bourses with the S&P BSE Realty index rallying nearly 16 per cent thus far in calendar year 2019 (CY19) as compared to 11 per cent rise in the S&P BSE Sensex, a report by Citi estimates the total capital stuck in realty projects across seven major Indian cities at Rs 800 billion.

“Our top-down analysis of 350 large stuck projects across seven cities (Bengaluru, Mumbai Metropolitan region (MMR), National Capital Region (NCR), Ahmedabad, Hyderabad, Kolkata and Pune) shows that around Rs 770 billion to Rs 1.15 trillion of total capital (land/construction cost) might be stuck and that the debt component could range from Rs 500 billion to Rs 700 billion. Factoring for a large number of small projects, we estimate the total debt stuck at around Rs 800 billion,” says the Citi report.

The study is based on a top-down analysis using the area in projects, selling price of projects, construction status, assumed construction costs (by city/ type of project) and land cost (as a percentage of selling price). Nearly 75 per cent of the stuck projects are in the mid-and-affordable segments. The average capital employed in these projects, according to Citi, ranges from Rs 1 billion to Rs 3 billion across cities.

ANAROCK Capital, on the other hand, had recently pegged as many as 5.6 lakh units worth Rs 4.5 lakh crore being stuck or delayed across the top seven cities. “For developers struggling to complete projects, joint ventures (JVs) offer a viable means to overcome financial distress. Developers are exploring alliances to jointly develop projects with revenue-sharing pacts. This trend is most apparent in Mumbai,” says Shobhit Agarwal, MD & CEO, ANAROCK Capital.

All gloom and doom for financiers?

The market reaction over the past few months to the likely default by realty companies to the loans from non-banking financial companies (NBFCs), Citi feels, has been overdone. One possible explanation for the sharp fall in stock prices over the past year, it says, is that the market is building in dilution in value of other businesses as capital is raised to support losses in construction financing.

“The correction in market values of select developer financing NBFCs over the past year seems excessive. While some of these will see some stress surfacing, the amount of defaults that are being built in by the market are extreme. Our analysis shows that current stock prices are building 50-100 per cent defaults in developer financing books of L&T Finance Holdings, Edelweiss Finance and LIC Hosing Finance,” the report says.

Thus far in CY19, a host of NBFC stocks have underperformed the frontline benchmarks. SREI Infrastructure Finance (down 70 per cent), Edelweiss Financial Services (down 49 per cent), L&T Finance Holdings (down 37 per cent) and Mahindra & Mahindra Financial Services (down 25 per cent) have been among the prominent losers. Among the lot, Citi remains bullish on HDFC, L&T Finance and LIC Housing Finance, which it believes are best plays on reversal of this overcorrection in real estate-linked NBFC stocks.

Analysts at Nomura, however, still remain cautious on NBFCs and suggest there has been deterioration in delinquencies for NBFCs / housing finance companies (HFCs) across segments.

“We have been cautious on NBFC/HFCs funding real estate, and the key question has been on growth and asset quality for retail NBFCs and banks. CIBIL data indicates that while there has been a slowdown in retail asset growth, the key trend to monitor will be retail asset quality, which has deteriorated in segments such as personal loans and autos for NBFCs,” the Nomura report says.

NCR has the highest stuck projects
City	Projects stuck	Capital employed *
Bengaluru	13	2,164
NCR	120	3,219
Ahemdabad	9	967
Chennai	47	1,263
Hyderabad	23	1,201
Kolkata	43	1,219
Pune	54	1,358
MMR	44	2,786
* Avg capital employed per project (Rs mn); Source: Citi report