As we shuffle through the headlines of Real Estate industry, it is a common sight to find debt laden developers going bust or being referred to NCLT, DRT, etc. The last five years of depressed market situation, resulting in poor sales, had pushed many developers to tap the debt market enticingly presented by the friendly-neighborhood finance consultant.
The lenders too, read Banks/NBFCs, left no stone un-turned and no turn un-stoned to shore up their assets by convincing the fund starved developer that tapping the debt is the most viable solution to keep the construction activity going on. The gullible developer found 'Debt-on-Tap' the easiest route to meet the bulging invoices of the vendors with the hope that someday, the prospective customer will reward him for his consistency at the construction site. The unhindered access to this easy debt, diverted the attention of the developer from sales to construction with the hope that 'ready possession' status will fetch better valuation to make up for the interest cost .
With the unforeseen events unfolding, little did the developer realise, that the 'Debt-on-Tap' could indeed land him into a 'Debt Trap'.
The prolonged dull market situation failed the developer big time. The fact that most developers are not marketing savvy, did not help their cause either. Barring few marketing-oriented developers, the industry in general, did not press the accelerator of sales which resulted in poor cash-flow situation. Due to this lethargic approach to sales, many developers couldn't even pay the interest on 'Debt-on-Tap', leave alone the principle.
Suddenly, the friendly-neighborhood 'saviour-like lenders' changed their attitude towards the developer. Many developers are now learning the full form of abbreviations like NPA, NCLT, DRT, IPC, CIBIL etc., the hard way.
So how does a developer ensure that 'Debt-on-Tap' does not lead to 'Debt Trap'?
First and foremost, it is very important to achieve the financial closure for the project envisaged even before a single stone is cast. A right combination of 'Equity-Debt-Sales' will lead to smooth operation of the entire business plan from beginning till the end of the project. Emphasis on sales will lead to lower debt and less chances of falling into a 'debt trap'. It would be more economical and rewarding to pass on to the customer a benefit, that would have otherwise been paid to the bank as interest for the amount borrowed. Better give a one time discount to customer than pay recurring interest to bank, month after month, year after year.
Secondly, the staggered construction plan directly linked to sales performance will ensure that the developer is not burdened with unsold inventory. Also, it will ensure that the pace of construction goes hand-in-hand with the pace of sales. In these uncertain times, it is advisable to be in at least '80% sold' situation before the construction is completed. The remaining 20% is manageable under 'Ready Possession' tag.
It pays to remember, "Banker lends an umbrella when the weather is fair and takes it away when it rains". It will be naive to be under the impression that banks support a struggling business. Even the funds supposedly created to revive the stuck Real Estate projects, are choosy and expensive. Therefore, it is advisable to Tap the Sales than tap the Debt-on-Tap.
Remember, It is rewarding to reward the biggest financier, CUSTOMER. He will not disappoint. He is the only one who can revive business for good.
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