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Soaring Indian Realty Ambitions Belie Rocky Foundations

When even the man who is building the world's tallest residential tower speaks of an Indian real-estate slowdown that could last for years, it is clear the foundations of a once-soaring industry are starting to shake.

BOMBAY, INDIA: A sign board 'Mumbai' is placed near the Taj hotel at the famous landmark the Gateway in Bombay, 13 May 2005. Since independence in 1947, regional advocates in India have called for a change in many place names to reflect the wide linguistic and ethnic variations in the country of one-billion-plus people that spans the Himalayans in the north to the meeting of the Indian Ocean and Arabian Sea in the south. AFP PHOTO/Sebastian D'SOUZA. (Photo credit should read SEBASTIAN D'SOUZA/AF
Sebastian D'souza | AFP | Getty Images
BOMBAY, INDIA: A sign board 'Mumbai' is placed near the Taj hotel at the famous landmark the Gateway in Bombay, 13 May 2005. Since independence in 1947, regional advocates in India have called for a change in many place names to reflect the wide linguistic and ethnic variations in the country of one-billion-plus people that spans the Himalayans in the north to the meeting of the Indian Ocean and Arabian Sea in the south. AFP PHOTO/Sebastian D'SOUZA. (Photo credit should read SEBASTIAN D'SOUZA/AF

Behind gleaming white gates, Abhisheck Lodha's 117-storey World One - where luxury apartments start at $1.5 million and rise past $15 million - will boast private swimming pools at cloud level and a 1,000-foot-high open-air garden.

But the promised 60-km view across India's financial hub of Mumbai will look down at a distressed real-estate industry crippled by high interest rates, rising costs and a sales crash that has left developers struggling with mounting piles of debt.

"We're certainly seeing a reduced rate of growth," the U.S.-educated managing director of Lodha Developers told Reuters.

"Real estate, instead of growing at around 15 percent, will probably grow at 9-10 percent for the next couple of years."

From the top of cranes that tower over the World One plot, where a thousand labourers dodge trucks to work on the colossal foundations of the half-kilometre-high tower, the view of a neighbouring site provides a picture of the fallout.

DLF, India's largest developer, had planned a luxury tower to rival the Giorgio Armani-designed apartments of Lodha's record-breaking skyscraper next door.

But that dream looks set to disappear with the sale of the plot as the firm scrambles to reduce its debt of $4.67 billion.

"India has two types of real-estate companies: heavily over-leveraged and reasonably leveraged," said Niranjan Hiranandani, one of India's leading real-estate developers.

Hiranandani's son, also a developer, built the world's current tallest residential block, the 395 metre, 90-floor-high 23 Marina tower in Dubai that was completed in June.

"The companies that are heavily over-leveraged are certainly in danger," he said.

The numbers are all moving in the wrong direction for developers in Asia's third-largest economy. Debt levels are rising as sales volumes and profits fall. Banks are shutting their doors to the industry just when it needs cash the most. Prices are stagnant and expected to fall.

"The marketplace is not foolish," said Lodha. "A price correction will happen naturally."

When the ground was broken at Lodha's dusty site in 2009, builders had been gorging on credit and splurging on land for bigger and bolder plans in the midst of a realty boom that started around four years before.

Since then, India's growth has tempered and interest rates have risen 12 times, hurting sales and pushing up the price of debt.

Steel and cement prices are up about 30 percent over the past year, while labour costs have risen due to scarcity of trained workers.

"Are there going to be months where companies might have to delay paying their interest? Yes," warned Lodha.

Fire Sales

Approaching the World One site along a pot-holed road beneath an overpass where homeless people squat amid the stench of refuse, it is hard to picture the gleaming Italian marble and concierge service that Lodha has promised.

The metamorphosis of a former cotton mill into billions of dollars worth of luxury apartments in a city where 60 percent of the population live in slums is testament to the economic rise of India that had made developers the toast of investors.

In early 2008, DLF, with a market capitalisation that peaked at over 2 trillion rupees ($40.6 billion), announced a fiscal year profit of over $1.5 billion - an annual increase of over 300 percent - thanks to an insatiable appetite for property.

But times have changed.

With a market capitalisation that has shrivelled to $8 billion, the firm has turned to selling the family silver. Amanresorts, the luxury hotel chain it bought in 2007, is on the block as part of plans to sell $650 million of assets by March.

It is expected to announce the sale of the prime 17.5 acre plot adjacent to the World One site in December, two sources with knowledge of the matter told Reuters.

The company said it would not comment on market speculation regarding the land, which it purchased in 2005 for just over $140 million.

Unitech, the No. 2 listed developer, has said it will offload 7 billion rupees ($142 million) of assets annually in coming years to service its $1.1 billion debt.

India's developers held $24.4 billion of outstanding credit at the end of June, up 23 percent from a year ago. Profits of major listed firms fell 19.5 percent in the same period and property sales in Mumbai slumped 33 percent.

"Developers will be very, very keen to sell off as much of their stock as possible this fiscal year," said Kaustav Roy, executive director of property consultants Cushman & Wakefield.

"And if they fail, in March the banks will be looking to close their accounts, and might end up having to foreclose some of their stock," he said.

Costly Credit

World One will start to rise above ground level from its 5-metre thick concrete foundations next month. While it must still negotiate an often-tangled regulatory process to get permission to climb above 90 storeys, it should meet its end-2014 deadline.

More than 40 percent of World One's apartments have been sold, but Lodha's 32-year-old MD says business had been held back by a sales crunch that began in January.

"Our overall general assessment is that sales are slowing," says Lodha. "But we have plenty of time."

Lodha's father, Mangal Prabhat Lodha — India's 50th-richest man according to Forbes — heads the family business. His son is confident that the company can weather the slowdown, given a relatively comfortable $410 million of debt.

Lodha recently issued $160 million of non-convertible debentures to meet a 25.1 billion rupee ($513 million) repayment to Deutsche Bank. The developer had already restructured the loan in January.

In July, it issued a 2.5-year bond at an interest rate of 17 percent, compared with its average cost of debt of 14 percent.

"Recent fundraising has been more costly," said the younger Lodha. "We don't think we can raise cash at expensive levels."

Lodha, which sold a 10 percent stake in World One for $100 million to India's top mortgage lender Housing Development Finance Corp in August 2010, at least managed to secure funding before the tap ran dry for the industry.

Central Bank of India and the country's largest lender, State Bank of India, both of which have loans to Lodha, will not make further loans to the sector, senior executives at the banks told Reuters.

Funding Drought

Real estate, which has garnered a growing slice of India's foreign direct investment (FDI) pie over the past few years, from 8.9 percent in 2007-08 to 11 percent in 2009-10, accounts for just 6 percent of the FDI this financial year, according to Ernst & Young.

India's realty index has fallen more than 36 percent since January, more than double the 17 percent slide in the benchmark Sensex, pouring cold water on the roughly $6 billion worth of planned initial public offering from developers.

Lodha's planned $570 million IPO has been stuck on the shelf for nearly two years.

More than $370 million in hoped-for IPO proceeds had been earmarked for construction costs, with another $61 million set to repay loans. That money has had to come from elsewhere.

Private-equity investors, which have poured $10.2 billion into developers since 2006, are set to withdraw around $5 billion in the next few years, forcing top developers including Lodha, Shriram Properties, DLF, Phoenix Mills and Unitech to buy back their investments, a Nomura report said in May.

Lodha counts ICICI Bank and JP Morgan <JPM.N> as equity investors.

Feeling the heat from rising land, construction and labour costs, many cash-strapped developers have refrained from dropping prices, despite a growing supply of unsold properties.

But they may not be able to hold out much longer.

"The current market sentiments and excess debt levels at high interest rates, against seriously impacted volumes, should bring about an immediate 10-20 percent price correction," said Sanjay Dutt, CEO, business , at property consultants Jones Lang LaSalle India.

"That means taking a cut in profit or accepting a loss on some projects ... We are likely to see some developers default on their debt," Dutt said.