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India’s sleepwalking to trouble on builder debt - Bloomberg

Infra News - Published on Tue, 19 Feb 2019

Image Source: BloombergQuint
Five months. That’s how long it takes Country Garden Holdings Co to start selling apartments after acquiring land. A spate of fatal accidents forced the Chinese builder to slow things down a notch last year, but the pace of construction may pick up again when robots start plastering the walls. The pressure to finish comes from the markets: Of the USD 14.6 billion the builder has to pay creditors between now and 2021, as much as 86 percent is return of principal. It has to give back that money (plus interest) and borrow afresh. Keeping up this live-wire act is how Country Garden acquired the scale to tackle 2,200 projects in 2018, a 13-fold jump in five years.

Compare this with the somnolent life of India’s developers. A six-year loan while they build at leisure? No problem. Don’t want to repay principal for the first four years? Even better. Maybe a six-month moratorium on interest as well? Shadow lenders can’t stop lining up at their doors. After all, the financiers earn a fee for every concession they make, and that juices up their returns.

Until there’s no juice left to go around. The funding squeeze faced by Indian nonbank finance companies after the collapse of IL&FS Group in September has seen embattled firms such as Dewan Housing Finance Corp. sell down some of their builder loans, offering a glimpse of the generous terms they’ve been offering.

Take India RE Opportunities Trust, assembled recently by Dewan to package and securitize two loans. The borrowers belong to the Wadia Group, which built the ship on which the American national anthem was composed. India’s oldest conglomerate is redeveloping its former mill land in Mumbai into residential towers. The two Dewan loans are for 72 months, including a principal moratorium of 48 months. Investors in the trust’s pass-through certificates will start receiving principal only in December 2021.

The time for masking such equity-type investments as loans has passed. Real estate in India is facing a glut, with $110 billion worth of unsold homes across the top eight markets, including Mumbai. That’s almost four years of sales, according to property analytics firm Liases Foras. Back in 2009, when apartment inventory was equal to about one year of sales, only 25 percent of construction funding came from shadow financiers. Banks controlled 75 percent.

Now that the underlying demand-supply situation has turned extremely slippery, the question is whether developers will feel enough pressure from struggling financiers to cut apartment prices and clear inventory, or if they’ll be bailed out. The absence of market discipline has kept Indian real-estate prices far too high for far too long.
By Andy Mukherjee

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Posted By : Rabi Wangkhem on Tue, 19 Feb 2019
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