FMPs shun realty debentures as investors shy away

The woes of the cash-strapped real estate sector seem to be growing. Mutual funds’ fixed maturity plans (FMPs) are the latest to turn their backs on real estate firms. Going by the portfolio of some of these plans, it is evident they are increasingly shunning real estate debt papers. Investors, sceptical about the credit payback ability of these firms, are reluctant to take risks.

It has been a tough time for the real estate sector, with sources of funds drying up and investors turning risk-averse. A slowdown in demand, coupled with high interest rates, has made matters worse for developers. Also, price correction and increasing inventory are adding insult to injury.

Recently, Fitch said the short-term outlook for India’s real estate sector is negative. “Growing liquidity concerns may lead to a possible negative impact on the credit profiles of real estate companies,” Fitch said. It had also downgraded short-term debt rating of Sobha Developers from F1 to F2 +. Similarly, Parsvnath Developers was downgraded from A to a A -.

Ramanathan K, the head of Fixed Income at ING Mutual Fund, said, “Now, one can get good rates in normal bank CDs (certificates of deposit). Earlier, when rates were low, people were willing to take higher credit risk.”

The portfolio of recent FMPs mainly contains bank and, to some extent, NBFC CDs. Today, there is minimal exposure to even NBFC papers. The global financial turmoil, which made some large banks collapse, has even cast doubts on foreign bank papers.

Distributors claim that some investors are unwilling to put money in schemes that invest in these papers. Though Citigroup and DSP Merrill Lynch’s debt papers were downgraded a few months ago, there is no such risk currently with Indian operations, say experts.

“In terms of credit, people are opting for superior-quality papers. They have become more conscious about ratings. Basically, they are looking for credit-worthiness and do not want to take risks for only slightly more returns. Investors are backing out of schemes with such exposure,” the head of a prominent distribution agency said.