Commercial real estate overall paints a bleak picture  

November 17, 2011

Phoenix Mills MC Mumbai project has Rs725.9 crore debt on its book

Moneylife Digital Team

Even before its launch, Phoenix Mills’ Mumbai Market City (MC) project looks like it is in for tough times. A report by stockbroker Emkay Global says that the project has a total debt of Rs725.9 crore and will have to operate at 80% occupancy to break- even at their fixed operating and interest costs.

“MC Mumbai faces a huge challenge in making its assets valuable. The project has huge debt in its books leading to 80% of net rental income going towards debt servicing costs. The special purpose vehicle (SPV), Offbeat Developers, doesn’t have capital to execute Phase 2 of the project which involves office space development of 0.9mn sq ft. Phoenix Mills intends to have joint development with the SPV or buyout the whole project FSI from the SPV,” says the report.

MC Mumbai will be soft launched in November end. Phoenix Mills has borrowed over Rs240 crore on its books to provide capital to MC projects either through loans or by buying out some assets in the projects. The company is reportedly cutting down on the frills and looking to acquire controlling stakes in its subsidiaries to simplify matters.

But Phoenix Mills is not the only company facing difficulties in the commercial space. SEZs, IT parks and other commercial properties have proved to be unviable, and many realtors are looking to sell such properties off to pay off their bulging debts.

“Global economy is in a turmoil and the domestic economy has turned sluggish. As a result, many companies are either consolidating their operations of shifting to cheaper places. So many of these office spaces, which builders had intended to sell to them, are lying vacant,” said a spokesperson of a realty company.

Merrill Lynch has put up its two properties at Nariman Point for sale. Standard Chartered and Hong Kong & Shanghai Banking Corporation (HSBC) sold their co-owned property recently. HUL is also looking to sell their Worli property. “Most businesses are trying to sell their non-core assets,” said an analyst.

“India’s commercial real estate sector is in very bad shape, and things don’t look like improving even within a year. Mumbai is no exception,” said Mr Pankaj Kapoor, MD, Liases Foras, “In Mumbai, 55 million sq ft of area is lying unsold and under construction. On top of that, there is huge secondary supply.” He said that rents, even at premium locations, have come down considerably due to the glut.

Investor confidence has also suffered. RICS India Commercial Property Survey, released last week, said that capital values have already seen a decline and turned negative for the first time since 2009.  

Banks have also been urged to be careful about lending to commercial real estate projects. The Reserve Bank of India, in its Report on Trend and Progress of Banking in India 2010-11, said, “There were emerging concerns about banking sector stability related to disproportionate growth in credit to sectors such as real estate, infrastructure, NBFCs and the retail segment. The growth pick-up in commercial real estate loans also deserves attention.” From September 2010, banks’ exposure to commercial real estate has increased by 12.6%. BSE’s realty index, from November 2010 to November 2011, has fallen by 43%.