Signs of stress: As fund flows dry up, Lodhas to sell assets to cut debt

With a continuous flow of funds from non-banking finance companies, coupled with land in the world’s most expensive real estate market, Mumbai-based Lodha Developers was on a concrete wicket till recently.  

Backed by a massive advertising blitz, with superstars as its brand ambassadors, the developer started new projects at a feverish pace, even as it raised more and more debt to fund them. 

By March this year, the company’s debt grew 21 per cent to Rs231 billion, but its sales jumped 25 per cent to Rs96.7 billion as well compared to the previous fiscal. An initial public offer (IPO) was to bring in another Rs50 billion by September to add to the company’s cash vault. 

The developer was moving ahead full steam with its plans when in September this year a crisis in IL&FS — which defaulted on its Rs910-billion debt—led to non-banking finance companies (NBFCs) tightening fund flow to real estate companies. 

This precipitated a crisis that no one saw coming. “There was a perception that if IL&FS being a ‘AAA’ rated firm can face this situation, then what will be the condition of developers who are infamous for opaque practices,” said a real estate analyst. 

Since banks stopped lending to NBFCs, they, in turn, stopped lending to developers. “NBFCs were also involved in refinancing of loans for real estate developers, which has now come to a halt as they themselves are feeling the pinch,” he added.

To make matters worse, the IL&FS crisis also coincided with a weak stock market — leading to Lodha Developers dropping its share sale plan. With the effects of demonetisation and Goods and Service Tax (GST) still being felt by the industry, the music for the party simply stopped.  “What started as a short-term fund mismatch was now threatening to become a full-blown crisis,” said a real estate analyst.
Meanwhile, mirroring the nervousness of investors, Lodha Developers International’s dollar-denominated bonds worth 325 million slumped as well, falling 17 per cent year-to-date as on Tuesday. The bonds are due in March 2020. 

“One of the reasons driving their dollar bonds to trade below par could be investor concerns about emerging markets in general. Lodha’s dollar bonds are trading at around 88 cents to a dollar, and do not raise concerns of distress yet as underlying cash flows are strong. While their leverage is slightly high at 80 per cent net debt to property assets, Lodha has been operating at this level for some time,” said Hasira De Silva, director-corporate ratings, Fitch Ratings.

The 62-year-old founder of Lodha Group, Mangal Prabhat Lodha, who is also the vice-president of the ruling Bhartiya Janata Party in Maharashtra, has been quick to take corrective measures. Taking a leaf out of its peer DLF’s books, the company has now decided to raise funds worth Rs50 billion by selling equity in two London properties and in its Palava project near Mumbai to a private equity firm. Early this year, DLF completed sale of its commercial assets and land parcels to Singapore-based GIC for  Rs93 billion to reduce its debt. 

Like other developers, Lodha has been battling slow property markets in the last couple of years. While GST and introduction of a real estate regulator have increased their compliance costs, the RERA (Real Estate (Regulation and Development) Act, 2016) has blocked many avenues such as pre-sales to raise money. Despite this, Lodha officials said, they reported strong sales in the first half — led by its affordable housing segment. 

“We had strong sales in the first half of fiscal 2019 and had record collections of over Rs47 billion. We expect to collect almost Rs95 billion for the fiscal ending March 2019,” said a Lodha official, adding that these numbers are unaudited.  

“Besides, we have built a strong office and retail renting business with total asset value of about Rs100 billion. Of this, space worth Rs25 billion is already ready.” 

So has the group managed to fend off the crisis? Analysts are not fully convinced. “They have many projects and very high borrowings. On top of that, sales of premium apartments are not happening. All this has led to a cascading effect on their financials,” said Ajay Jain, chairman and managing director at Monal Capital, a real estate advisory firm.

Another worrying trend is that customers who had bought earlier as investors are offering their apartments at a price far lower than the ongoing rate in projects nearing completion which has hit new sales, Jain said.

Getting out of the financial crunch may be hard. “Since Lodha’s IPO has been deferred, they have to find other avenues to repay money,” added an official of an MNC real estate advisory firm.

The executive said that any residential real estate player would find it difficult to take the company to IPO now. “If Lodha was a big commercial real estate player, they could have easily raised the money from capital markets,” he said, referring to the boom in absorption of commercial properties by global private equity companies. 

“They said they will do an IPO based on good sales and profits, then deferred the IPO and plan to sell projects in London. If the closely held overseas bonds tank, there must be some concerns,” he says.

For now, the company is dipping into its cash reserves to repay debt. The company has enough cash, said Shobhit Agarwal, managing director of Anarock Capital. “They have not defaulted on any loan to date.”

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