The Indian realty sector has faced many challenges over the past five years. The whole sector was still at an extremely high point. The economy was in a boom, and sales would continue to rise even as prices rose year after year. The Indian real estate market stagnated in 2013 however. The market collapsed because the prices did not rise. The market has been priced out by genuine buyers due to the already high house prices. The market at the moment can be described as a standoff among the builders and the buyers. Builders are working hard to convince home buyers that housing prices will fall soon, while they are eager for them to do so.
It is important to understand that many Indian real estate developers were heavily leveraged. They face imminent bankruptcy as sales have declined over the years. The real estate sector is the largest category of applicants to India’s bankruptcy courts since their inception in 2016.
The industry is in crisis. Recent studies have shown that less than half of the interest builders must pay to cover outstanding loans in 2018 was generated by the realty sector. The impact of bankrupt builders is not only for builders. Many people will be affected.
We will be taking a closer look at what the impact of real-estate bankruptcies might be:
Home Buyers – The most visible group that will be affected by real property bankruptcies is the home buyer. Indian homebuyers were at the mercy of real estate developers in recent years. Because they weren’t given financial creditors status, this is why. Therefore, their claim to the asset was less than the claims made by banks or other financial institutions. The homebuyers almost lost their money in bankruptcy. In recent years, this has been changed. A government ordinance has been passed that will give homebuyers the same rights and privileges as financial creditors. This means they will not only receive any proceeds from the sale but also the necessary voting rights. The bottom line: Today’s homebuyer has more protection under the law. But they don’t have the resources or time to fight long court battles.
NBFC – The Non-Banking Financial Corporations, (NBFCs), will be one of India’s most prominent casualties in builder bankruptcies. The new rules by the government have made it unviable to lend money to builders. The current economic situation made it clear to banks that lending money to builders was risky. This is why banks have increased their exposure in the tulum beach real estate for sale sector only by 4% in three years. NBFC’s on the other side have made every effort to lend more money to builders. Their exposures have increased by 46% over the same period.
IL&FS, India’s largest NBFC, came under financial scrutiny after it defaulted on its loans. This led to the collapse of other NBFCs. Another scam was found at DHFL. Investors are now reluctant to lend money NBFCs. This has led to these companies being unable or unwilling to lend more money. Many of their loans are owed in part by precarious builders.
Mutual Funds. NBFCs may have different sources of funds. They may borrow from banks to further finance their operations, or they might resort to capital market borrowing. Recent times have seen a lot more of these loans that were granted to builders being financed by mutual funds that are yield-hungry and based on debt. These funds would lend money to NBFCs who would then distribute it to the builders. Consequently, NBFCs that go bankrupt will not be able to pay their debts and mutual funds will be next in line.
Why will deleverage make things worse?
The problem with real estate is that you have to throw good money after bad. If lenders realize that they have made poor loans, they should cease making more loans. But real estate is not as simple. Because there are so many incomplete projects on the market, this is why it’s not easy to find real estate. If there isn’t more funding, even perfectly viable projects may become unviable. This could lead to more bankruptcies which will perpetuate the cycle. Falling prices will not solve the problem, as it was rising real estate prices that initially attracted buyers. Any potential buyers who see a falling price will run away, which will make matters worse. Banks, mutual fund managers, homebuyers, and NBFCs will have to be more careful when dealing with real estate developers. Bankruptcy would not be good for anyone.
In the end, even though bankruptcies in real estate are likely due to current market conditions here in India, they must be managed carefully.