Indiabulls Real Estate on the mend post demonetization hit – Fitch

Fitch Ratings affirmed property developer Indiabulls Real Estate Limited’s Long-Term Foreign-Currency Issuer Default Rating at ‘B+’ with a ‘stable’ outlook, noting that conditions for the real estate developer are improving.

“The Stable Outlook reflects the recovery in IBREL’s contracted sales following India’s currency demonetisation last year,” it said.

However, it said it couldn’t upgrade the company as it has limited rating headroom due to the high debt levels on the company’s balance sheet.

Moreover, it said, Indiabulls Real Estate is likely to use improving collections in its property development business to fund expansion in its investment-property portfolio.


Fitch said the company has seen improvement in its operational metrics since the days of demonetization last year. The company’s presales had fallen by nearly 13% to Rs 25.4 billion in FY17.

“However, quarterly sales have recovered, with contracted sales reaching INR8.8 billion in 1Q FY18, compared with INR2.6 billion in 3Q FY17 and INR7.0 billion in 4Q FY17,” Fitch said.

It said it expects significant collections from Blu, the company’s luxury residential project in Central Mumbai, and Greens, a mass-market project in Panvel, Navi Mumbai.

The two projects had pending collections — net of remaining development costs —
of about Rs 28 billion as of 30 June 2017, it said.

The company sold about a third of the homes in the Blu project in the six months to June 2017 because road connectivity improved and buyer interest increased as the project neared completion, it pointed out.

Moreover, Indiabulls’ land bank of 2,588 acres in Nashik and 1,046 acres at the National Capital Region (NCR), Mumbai and Chennai can support six to seven years of development, it said. This will ensure that the company is not forced to buy new land at high costs, it said.

Fitch expects the company’s strategy to expand its investment-property portfolio to add some stability to the company’s cash flows, which are subject to cyclicality in its property-development business.

“With the larger stake in Indiabulls Properties Investment Trust, the company controls two high-quality office properties with 3.3 million square feet of leasable area and INR 6 billion in annual rental income,” it noted.

“The properties benefit from sustained high occupancy (in excess of 90%), long-term leases with institutional tenants, and built-in annual rental increase of about 5%.”

In addition, the company acquired 1.9 million square feet of office space in Chennai in March 2017 and intends to develop additional investment properties in Mumbai and NCR, which will increase its leasing portfolio to about 9 million square feet and INR14 billion in annual rental income over the next four to five years, it added.

It also noted that the company soft launched its mixed-use project in the Mayfair district in London in 1Q FY18 and sold four of the 79 units, which it said is a good response that tapped Asian investor interest amid a weaker sterling.

A formal launch of the property is due in 3Q FY18.

Fitch expects the project, which has all the requisite approvals in place, to generate significant cash flows upon its completion by 2020 or 2021. It said it did not “see any material funding requirements for the project as the company reduced the debt borrowed in London by almost 50% after March 2017 and construction cost of GBP158 million is manageable relative to sales potential of GBP572 million.”

It also expects limited impact on the company from new real estate regulations.

“The implementation of India’s Real Estate Regulation Act of 2016 (RERA), which came into full effect on 1 May 2017, would restrict property developers’ ability to move cash freely out of construction projects. Nonetheless, we expect Indiabulls Real Estate’s financial flexibility to remain good because many of the company’s key cash-contributing projects are in advanced stages of construction.”