Bengaluru: Mumbai-based developer Hubtown Ltd has delayed the redemption date for payment of the principal of non-convertible debentures (NCDs) worth Rs.100 crore, owing to a liquidity crunch, the company said in a notice to BSE on 16 December. The due date for redemption was 14 December.

“The company is exploring alternative sources of finance to generate adequate cash flows to overcome the liquidity crunch and is hopeful that these efforts will yield fruitful results,” the notice said.

Hubtown’s predicament is an indication of what many other realty firms are likely to face in the months to come, as a two-year slowdown in the sector continues to persist.

Despite the gloom-and-doom situation, private equity (PE) funds and non-banking finance companies have been lending to developers at a frenetic pace. Equity capital has almost disappeared from the market, with high-cost debt and structured debt lending through NCDs flooding the sector.

As project sales reduce to a trickle and cash flows remain uncertain, many developers have taken expensive loans, putting them in a potential debt trap.

Weak sales apart, developers are also struggling with lengthy project approval procedures, which make it tough to pay interest on time.

Mid- and small-size developers are finding it tougher because they have limited projects and project-related cash flows to offer as collateral to lenders.

A realty firm in Bengaluru, which took a loan from a Mumbai-based non-banking finance company recently, delayed the payment schedule after its projects didn’t take off due to delayed approvals, delaying sales.

“Balance sheets of developers are fairly stretched with sales not happening; delayed construction leading to customer advances not accruing, resulting in more debt to finance existing loans. It’s a sword hanging on real estate firms as they feel the pressure of repayment obligations,” said Shashank Jain, partner, transaction services, PricewaterhouseCoopers India.

While refinancing is an option, it only means taking on new debt, often at a higher cost, with a new moratorium, Jain added.

Some developers have understood that refinancing is only temporarily delaying repayment timelines, and unless cash flows are generated, it is a vicious cycle.

Hubtown’s managing director Vimal Shah said the firm isn’t interested in refinancing, and is looking at other options to repay the principal amount.

This is the second time Hubtown has been unable to meet the scheduled payment timeline. In March 2013, Brickwork Ratings Pvt. Ltd lowered its rating on a Rs.100 crore long-term secured NCD issue to ‘D’ “following the intimation from debenture trustee that the company has defaulted on repayment of interest and principal obligations of the rated NCD”.

Century Real Estate Holdings Pvt. Ltd, which raised Rs.720 crore in October from Piramal Fund Management Pvt. Ltd and Altico Capital India Pvt. Ltd, in one of the largest structured debt transactions in recent times, used some of the money to refinance loans of its existing investors—Piramal Fund Management, which had earlier put in around Rs.90 crore, exited and then reinvested again with Kotak Realty Fund.

Century’s managing director Ravindra Pai said that this was an attempt to consolidate its lenders through a single transaction where it also got a good window for repayment.

“We have about Rs.550 crore of debt now and we are looking to monetize a couple of our land and rent-generating office assets to repay the debt as soon as possible,” Pai said.

PE funds have invested about $2.6 billion between January and November this year, compared with $2.1 billion in 2014, according to data by VCCEdge, which tracks investments. Non-banking finance companies have been equally aggressive in lending at competitive rates to the sector, as demand for capital continues to be high.

This leads to the inevitable question: Does India’s real estate sector, which has been heavily dependent on debt lending to survive the bitter slowdown, need to move towards an equity capital regime now?

“Debt is a predefined quarterly payment system while equity means you pay when you can or if you can. As equity capital providers, we absorb project or approval delays and take that risk along with the developer unlike debt where payment schedules are predetermined,” said Amit Bhagat, chief executive officer and managing director at ASK Property Advisors, which makes equity investments in residential projects.

Analysts believe that while equity is the way going forward, most fund managers still shy away from taking on that risk given the huge setback that the sector has faced in recent times.

“We have raised debt in the past but now we are in talks to raise preferred equity for two of our upcoming projects. The nature of the business is uncertain and delays are sometimes out of our control, and raising equity will give us that comfort,” said Pratik K. Mehta, managing director of Bengaluru-based Unishire Urbanscape Pvt. Ltd.

Madhurima Nandy