Fund managers gung-ho about realty debt papers

The outlook on real estate sector may not be too bright at the moment, but that is not deterring mutual funds from investing in paper issued by property developers.

In addition to the old restructured papers of Gurgaon-based builder Unitech, debt schemes of fund houses like SBI, ICICI and UTI have invested in papers of companies like K Raheja, Emmar MGF Land and Shapoorji Pallonji.

As per mutual fund tracker Value Research, UTI Bond (medium term) fund has invested Rs 14.7 crore in ‘BBB’-rated floating rate bonds of Emmar MGF Land. ICICI Prudential Liquid Fund has invested over Rs 421 crore in secured debentures of K Raheja Corporation. LIC Income Plus and SBI Short Horizon Debt Fund have invested Rs 1.8 crore and Rs 1.6 crore respectively, in the ‘A1’-rated commercial papers of Shapoorji Pallonji.

However, raters tracking debt are comfortable with the debt-equity mix of most real estate companies and are positive on the sector. “The fundamentals of India’s real estate sector are improving, as seen by better liquidity and improved demand in the residential segment,” said Rakesh Valecha, senior director, Fitch Ratings.

Enhanced affordability, lower mortgage rates and better job security have helped revive demand for homes, according to Mr Valecha. “Demand in the commercial segment remains weak, primarily due to over-supply and the scale-back of expansion plans by corporate India. But then, we expect demand for commercial spaces to improve in the second half of 2010,” he added.

According to analysts, in sharp contrast to 2007 and early 2008, real estate companies are not investing money to acquire mass land bank or other fixed assets. Post the turmoil in end-2008, real estate companies have realised the need for a stronger balance sheet. Many over-leveraged real estate firms have used their cash in books to de-leverage themselves.

Equity analysts tracking the sector are currently maintaining a neutral to near-positive outlook on the real estate sector. They expect prices to be stable in the medium term due to good demand. Property prices may only rise 3-5% over the next few months, say analysts.

Such a price trend could sustain the demand for real estate for a longer term. Moderate demand will enable real estate companies to complete existing projects and take up new ones. Pressure on profit margins, however, cannot be ruled out, analysts opine.

Overall, credit metrics are expected to recover in 2010 and 2011, as developers are expected to improve their capital structure, operating margins, and liquidity. According to sources, the restructured loans of Unitech are expected to come up for repayment (or reaching maturity) in about 6-8 months’ time. Unlike in 2008, fund managers and paper valuers are not expecting the company to have too many problems in repaying the debt.

Debt schemes like HSBC Cash and HSBC Ultra Short Term Bond, Kotak Flexi Debt, Reliance Money Manager and Sundaram BNP Paribas Ultra Short Term fund still have investments in papers of Unitech. The Gurgaon-based company had restructured and rolled over the debt due to mutual funds in early-2009, as it was not in a position to repay because of low demand for real estate and beaten-down prices.

“We’ve not made any fresh investments in real estate companies since 2008. Our current investment in Unitech was done some time ago. In fact, our current investment is just 10% of what it was two years ago,” said K Ramkumar, head-fixed income, Sundaram BNP Paribas Mutual Fund.

“Unitech has paid back almost 90% of the debt in time. It is paying us a bulky monthly coupon as per a pre-set arrangement. Our investments are perfectly in order,” Mr Ramkumar added.

Source: http://economictimes.indiatimes.com/markets/real-estate/realty-trends/Fund-managers-gung-ho-about-realty-debt-papers/articleshow/5865613.cms