Real estate companies see their debt increase as they invest in new projects

By Raghavendra Kamath

Major listed property developers such as Godrej Properties and Prestige Estates saw their net debt increase in the June quarter as they launched new projects and struck new deals. Analysts and companies have said their debt is expected to rise further in coming quarters for similar reasons. Godrej Properties’ debt rose by 490 crore in the quarter as it only generated 20 crore in operating surplus and spent 540 crore on land purchases. When contacted, Mohit Malhotra, Managing Director and CEO of Godrej Properties, said that the level of net debt will increase in the coming quarters due to the deployment of liquidity (capital raised through QIP) for new projects.

“However, our debt ratio is currently in a very comfortable range and we intend to maintain it within the range of 1 to 1:5 in the short term, depending on new business development opportunities. While the cost of borrowing will increase due to the increase in the repo rate, we will continue to have the best borrowing rates in the industry,” he added.

Regarding how the company plans to reduce its debt, Malhotra said the company has enough excess cash to deploy for the acquisition of new projects. Otherwise, for working capital, Godrej Properties does not need to go into debt because the ongoing projects are self-financed. “In addition, we expect to significantly improve operating cash flow as we focus on OCs and deliveries, resulting in higher collection from existing customers.”

Analysts said generating cash flow is crucial for the business. “With major land acquisitions planned in FY23 (including a large project with a potential GDV of `5,000 crore), operating cash flow will be the controllable key going forward to control levels leverage,” Adhidev Chattopadhyay, vice president of equity research – real estate and hotels – ICICI Securities, said in a recent report. GDV refers to Gross Development Value. The company expects to achieve sales bookings of `10,000 crore in FY23 and expects a similar growth of 20% over the next two to three years. The company has a strong launch pipeline for FY23 and beyond (Ashok Vihar, Pune Township, Worli) which would help it achieve the targets. Moreover, he is also at an advanced stage to sign big projects that will add to that, Malhotra said. Properties. International brokerage Jefferies said the company’s leverage ratio is expected to drop from 0.4x to 0.5x in the coming quarters.

Also Read Godrej Properties aims to add new projects worth Rs 15,000 cr in FY’23

Prestige is looking to garner presales of over 12,000 crore in FY23, with residential projects in major markets such as Bangalore and Mumbai likely to contribute 8,000 crore and 2,500-3,000 crore respectively. Prestige has nearly 15 million square feet of new launches over the next few quarters this year. Several launches are planned in geographies outside of Bengaluru such as Hyderabad, Mumbai and Noida, the company had announced earlier. The property company had sold some of its business assets to the Blackstone Group in 2021 to reduce its debt. Experts said an increase in opportunities for A-level developers has led to an increase in their debt. “While we’ve seen an increase in net debt and its attendant issues in the past, I think today developers – especially A-tier players and enterprises – have learned the lessons and are much more cautious in this regard. Debt levels will still increase given some very good opportunities ahead due to consolidation via acquisition or joint venture or joint development options. But not all increases in debt should be looked at from the same angle,” said Shobhit Agarwal, managing director of Anarock Capital.

In the rising interest rate scenario, the cost of debt will definitely increase, but we need to look at this against the type of business opportunities developers are engaging in and what the impact will be on cash flows. cash over the next three years – which in most cases is moving towards the positive side, Agarwal said. “Developers will continually update assets and, if necessary, seek to add newer but short-term development assets and be light on long-term development options. This will be an ongoing phenomenon and takes makes sense in the larger scheme of things,” he said.

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