Ripple effect

In my earlier article (Way Out!)I have expressed that it will take some time for the realty sector to come out of the blues and with each passing day things will become tougher for everyone in the market be it developers or prospective buyers. Real estate companies and upcoming projects will be subject to stringent regulatory checks and controls. On the other end financial institutes has raised the bar for margin money to 20% from 15% earlier, which means the prospective buyers need to shell out additional 5% margin on their purchase.

Discovery of loan scam will have ripple effect and will trigger many events perpetually.

Prima-facie it is learnt that post discovery the real estate prices will decline which in turn will trigger margin calls for the developers who has placed that land banks as collateral. Developers, who have borrowed money by placing land/ project as collateral, will have to replenish margins that have fallen due to correction in overall property prices.

Real estate developers will be forced to borrow money at high cost or place more property as collateral to fill-up the lost margin. Developers will rope in money by inviting investment as a part of fixed maturity plan (FD’s) and might offer interest rates which will be obviously higher to other financial institutes. But possibility of raising funds through this route is also tougher as Real estate developers fixed maturity plan are finding few takers post meltdown and recent scam headlines have further dampened the already difficult fund raising efforts by them.

Apprehension, difficult to answer in a very immediate term, one has to wait and watch to see the market reacting, Developers will definitely explore Fixed maturity plans deposit route for funds raising by offering good interest rates. Investors who love to pursue risk can definitely explore the option as risk reward ratio will be lucrative but simultaneously should not forget to read the ratings given by rating agencies before investing.