Total downgrades of real estate companies by ICRA, a leading credit rating agency, in financial year 2018-19 outnumbered the upgrades signifying the deteriorating health of the sector. In the just concluded financial year, there were 19 downgrades of real estate companies as against 14 upgrades.
Major downgrades during the period were Ireo, Peninsula Land, VBHC, EmaarMGF, Pioneer Urban, and Bengal Ambuja Housing. On the other hand, major upgrades during the period were DLF, DS -Max, Gaursons and Aparna Estates and Construction. During the period four entities were downgraded to D due to default – two each from BB and B category.
According to the credit rating agency, realtors with AA or A rating depended less on Non-banking Finance Companies (NBFCs) for their funding requirements while the dependence on debt finance from NBFCs was the highest among BBB category companies. In case of AA companies hardly 3% of the total funding came from NBFCs while this ratio was 60% in case of BBB rated companies. AA rated companies mostly depended on CP/NCDs or overdraft facilities from banks for their funding needs.
According to ICRA, small number of BBB rated companies resorted to IPOs during the period to raise funds to create land banks. BBB rated companies mostly depended on NBFCs and HFCs for buying land. ICRA has found reduced risk appetite of banks for project financing in realty sector with less number of companies providing project finance. NBFC /HFC lending to commercial real estate sector (CRE) is estimated to be around 1.3x of the banking sector exposure to CRE. The report has also highlighted that many NBFC loans have extended moratorium with low scheduled repayments in the near term.
Another interesting fact is that top 5 NBFC/HFC lenders account for 94% of the total credit from the segment to ICRA rated portfolio in AA category. At the same time share of top 5 NBFC/HFC lenders reduces to 64% in BBB category.