Kotak Investment Advisers Doesn’t Expect A Fire Sale In Property Market

A slowdown in lending from NBFCs to property developers won’t trigger fire sales, says Kotak Investment Advisers.

Tower cranes operate in a residential building construction site  in Noida, Uttar Pradesh, India. (Photographer: Prashanth Vishwanathan/Bloomberg)
Tower cranes operate in a residential building construction site in Noida, Uttar Pradesh, India. (Photographer: Prashanth Vishwanathan/Bloomberg)

A slowdown in lending from non-bank financial services companies to property developers won’t trigger a fire sale as the situation is not as bad as in the aftermath of the 2008 Lehman collapse, according to Kotak Investment Advisers.

“Unlike equity markets, a homeowner who has bought a piece of real estate at a higher price will show up at the door of the developer if he sells a previously high-priced property at a lower ticket rate,” said S Sriniwasan, managing director at Kotak Investment Advisers.

To generate cash, developers can make bulk sales to real estate funds and other such buyers, he said, adding that stronger developers can be invited to build on undeveloped land parcels. “But distress sales are unlikely to be the answer.”

Non-bank lenders, particularly housing finance companies, face liquidity concerns after defaults by Infrastructure Leasing & Financial Services Ltd. and its subsidiaries triggered fears of a contagion in the financial markets. That stems from their reliance on market borrowings through commercial paper and bonds for short-term funds.

Delays and defaults happened in the past, but companies were able to tide over that due to ample liquidity, Sriniwasan said. “This time, only the fitter NBFCs would survive. If you are mid-sized, you might either get eaten up by a bigger player, or you would go out of business,” he said, adding that there will be takers for well-run NBFCs.

For the well-capitalised non-bank lenders with a sizeable real estate exposure, Sriniwasan said the cash-flow pain could last for another six months. NBFCs will find it challenging to raise capital but money will be available at a higher cost, he said. Similarly, better-capitalised developers will also potentially see credit lines open up, albeit at a higher cost.

Bulk of the credit growth for NBFCs, however, has come from under-construction projects in the last three years, many of which were in the slow-moving luxury segment. “To expect cash flows to come in from these is a very charitable assumption.”

Sriniwasan said part of the reason why Mumbai, India’s second-largest real estate market, is stagnant is there is a massive inventory of ready and about-to-be-ready apartments, often costing Rs 10 crore to Rs 15 crore each. It will be difficult to find takers for them and prices will correct gradually, he said.

It’s important for the lending NBFC to take charge of the project if things don’t go as planned, he said. Kotak did that for some projects, helping it generate cash flows. “If you are a lender and if you are only relying upon the execution skills of the borrowing developer, you have no choice but to roll up your sleeves and get down to hard work.”

Watch the entire interview here