Current leverage levels in real estate are not sustainable as developers have to increase sales by 2.5 times to be able to service the debt, which stood at over Rs 4 lakh crore at the end of last year. The amount has increased over three times from Rs 1.2 lakh crore in 2009, raising concerns over default by even the top players in an industry severely impacted by the IL&FS crisis, a new report pointed out today.
"The total disposable income of top-90 developers, including their rental income from different properties, is Rs 23,564 crore but the repayment required is Rs 45,128 crore. Due to the gross mismatch it seems current debt levels are not serviceable," Liases Foras founder and MD Pankaj Kapoor said in the report.
In order to meet debt obligations, developers will need to increase their EBDIT by 1.92 times. And to make profits to the tune of 15 per cent, they will need to increase their EBDIT to 2.20 times, or simply double up sales volume.
"IL&FS default and the ongoing speculations about DHFL have made industry stakeholders anxious yet again. The existing scenario has exposed the inefficiency within the sector. While debt has grown in a monumental manner and so has the inventory, sales did not go up in the same proportion," he added.
Developers took debt and 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. "In the past 10 years while value of sold stock has increased by 1.56 times, the value of unsold stock has become 4.72 times," said the report.
In terms of units, volumes of sales have gone up by 1.28 times while inventory increased to 3.33 times between 2009 and 2018. In the same period, lending to the real estate sector has gone up from Rs 1.2 lakh crore to Rs 4 lakh crore.
The report said the residential market generated Rs 2,40,000 crore as yearly revenue in 2018. Top eight cities of Mumbai Metropolitan Region, National Capital Region, Bengaluru, Pune, Hyderabad, Ahmedabad, Chennai and Kolkata cornered more than 80 per cent of the entire business, generating Rs 2,15,000 crore out of the total revenue.
"And out of the total kitty of Rs 2,40,000 crore, top-90 developers in the country accounted for about third of business and generated Rs 78,879 crore," it noted.
"We feel the situation of developers is akin to an elephant in a well which is unable to come out on its own. Somebody needs to replenish the well. But can we find cheap capital to refill the well? The existing scenario signifies that the industry is at an inflection point and is staring at long-due price correction in order to improve sales," Kapoor added.