Combined debt is more than ten times their earnings before interest and depreciation (EBDIT), indicating the inability to service debt and stay solvent.
Top 54 developers in Northern and Western India run the risk of defaulting on their loans because of the growing mismatch between their operating profits and interest obligations. The combined debt of these developers is now more than ten times their earnings before interest and depreciation (EBDIT), indicating the inability to service debt and stay solvent.
Top 20 developers in North India have a debt pile of Rs 40,591 crore, which is double their income of 20,883 crore and almost ten times the EBDIT of Rs 4,176.7 crore, according to data from real estate consultancy Liases Foras. In the western region, 34 developers have a debt of Rs 74,503 crore on income of Rs 33,110 crore and EBDIT of Rs 6,622 crore.
Typically, developers borrow at rates between 10 to 15 per cent, translating into an average interest of Rs 12 crore annually on a debt of Rs 100 crore.
"While debt has grown in a monumental manner and inventory too, sales did not go up in the same proportion. Developers kept adding housing stock into the market without any productivity. Since sales remained abysmal all this while, developers are finding it difficult to meet their debt obligation at this point," says Liases Foras MD Pankaj Kapoor.
Developers in South India had the least amount of absolute as well as relative debt. The figure stood at Rs 30,410 crore for 36 developers, with an income of Rs 24,887 crore and EBDIT of Rs 4977 crore.
Amit Goenka, managing director at Nisus Finance, said the problem areas in North are Gurugram and Noida. "Gurugram ended up becoming a luxury market without the accompanying infrastructure. When the demand for luxury slowed down, investors left the market while developers continued to borrow money to complete inventory, which was slow moving," he says.
When market slowed down post-demonetisation, cash had to be replaced and people then had to borrow to repay. "It hit Gurugram the most as it was very cash driven," he adds.
In Noida, delay in regulatory clearances and land acquisition delayed project timelines and developers had to service debt without any earning. "A three-and-a-half-year hiatus in Noida Extension due to land acquisition issues hurt the developers. The entire economics changed between 2008 and 2018; land payment was not made, product was sold at cheap rates and farmer's agitation escalated costs of development. This led to negative margins in the region and debt pile continued to grow," Goenka says.
In the Western region, Pune is reeling under over-supply while Mumbai's long gestation slum rehabilitation projects increased the costs for developers. In 2011, Development Control and Promotions Regulation (DCR) changed and work was stopped at many sites. "Many projects had to be re-planned and new charges had to be paid. The entire configuration of many projects changed and sales dropped," he adds.
Alongside, the ready reckoner rates kept going up, pushing up premiums. "So while were prices not rising, costs were rising, for which developers continued to take new loans. This added to the burden," says Goenka.
For now, developers are staring at defaults. And it is inevitable for the house of cards to crumble.