Harsh reality check for India's realty developers

Listed realty developers saddled with unsold properties worth Rs 1 trillion

Real estate developers have continued to add inventory despite a slowdown in the offtake of new properties. At the end of the September 2018 quarter, India’s top 27 listed realty companies had unsold inventory worth Rs 1.13 trillion, up 21 per cent from Rs 93,358 crore at the end of the March quarter.

The inventory was equivalent to 32 months of the industry’s annualised net sales in the first half of 2018-19 or FY19, up from 25.2 months worth of inventory at the end of March 2018 and 22.7 months at the end of March 2016, according to the balance sheet data for the companies.

This is the highest level of unsold inventory for the industry in nearly a decade.

For example, the sample companies together had unsold inventory worth Rs 90,000 crore at the end of March 2014 and it was equivalent to 23 months’ worth of sales in 2013-14.

Analysts said the growing mismatch between revenues and inventory of unsold properties had created a cash crunch in the industry.

“Every unsold property or house is lost revenue for a developer and they have to find alternative sources of funding to pay for the expenses involved in creating inventory in the first place,” said Pankaj Kapoor, managing director, Liases Foras.

In recent years, non-banking financial companies (NBFC) were a key source of funding for the industry, but this source has now nearly dried up after massive default by Infrastructure Leasing & Financial Services on loan repayment.

“The liquidity crisis in the NBFC sector has made it tough for builders to hold on to unsold inventory, forcing quite a few to default on interest payments to lenders,” said Samir Jasuja, chief executive officer of realty research firm PropEquity.

In the past three years, the industry’s net sales have declined at a compound annual rate (CAGR) of 3.2 per cent, while the unsold inventory has grown at an annualised rate of 8.2 per cent.

The sample companies in our analysis reported combined net sales of Rs 42,598 crore on an annualised basis during the first half of FY19, down from around Rs 47,000 crore during 2015-16.

At the end of September 2018, DLF had the largest inventory in the industry at Rs 23,815 crore, equivalent to nearly 39 months of sales.

It is followed by HDIL (Rs 14,560 crore) and Prestige Estates (Rs 12,795 crore), Indiabulls Real Estate (Rs 10,470 crore), and Omaxe (Rs 8,048 crore).

The analysis is based on the historical financials of a common sample of 27 real estate developers that are either part of the BSE 500, the BSE Mid-cap or the BSE Small-cap index.

Some of the builders in our sample are DLF, Godrej Properties, Prestige Estate, Oberoi Realty, HDIL, Indiabulls Real Estate, Sobha, Omaxe, Kolte Patil Developers, and Puravankara, among others.

Analysts said the numbers for listed companies understate the issue of unsold inventory in the industry.

“Our data indicates that unsold inventory for the industry stands at nearly 40 months, over three times the level in an efficient market.

"This implies it will take more than three years for the industry to clear its inventory at the current rate of absorption,” adds Kapoor.

According to Jasuja, a major chunk of the unsold inventory comprises projects which were launched in 2014 or 2015 and are due for completion this year.

“Completed projects are seeing a good absorption rate and there is a healthy demand for new launches by reputed builders.

"But buyers are staying away from projects that have not been completed as yet creating cash-flow issues for builders,” he added.

Photograph: Danish Siddiqui/Reuters