MUMBAI: Falling sales have dimmed the hopes of cash-strapped real estate developers for refinancing their debt obligations in FY18, says India Ratings and Research.
The sector has mainly relied on refinancing to meet debt servicing obligations given the negative cash flows, and is unlikely to witness a revival in sales in FY18 and refinancing will increasingly become difficult, it said.
“Such refinancing has provided a cushion for developers to hold prices despite slowing sales, and the high prices will further delay recovery in sales and cash flows,” the rating agency said in a statement issued here.
Realty players have been less reliant on bank credit, and the growth in banking credit to the commercial real estate sector slowed down in FY17, with a growth of mere 0.4 per cent since the start of the FY17 till January 20, it said.
Also, a significant interest had been observed from non-banking finance companies and private equity investors for refinancing debt in the last three years.
“Finances of real estate developers continue to remain stretched due to elevated inventory and debt. It is estimated that debt levels will further rise given the negative operating cash flows,” the agency said.
It noted that the Indian realty market is currently grappling with a double whammy: cash shortage caused by the impact of demonetisation and the imminent introduction of the Real Estate Regulator (RERA).
“This, along with the increasing refinancing risk, would shake up the sector, with developers with high leverage losing out. The sector also needs to undergo a structural change in the way it does business and move towards a model where projects are completed before sale. Such a structure would favour real estate companies having better access to funding,” it said.