Lehman Brothers' Collapse Creates Ripple Effect in Indian Real Estate Market
The bankruptcy of Lehman Brothers is poised to significantly impact the Indian real estate sector, potentially costing the industry an estimated $1 billion. This includes existing investments of $500 million in prominent real estate firms like DLF and Unitech, as well as jeopardizing an additional $500 million in potential investments earmarked for Unitech's Mumbai projects.
The news of Lehman Brothers' downfall sent shockwaves through the Indian stock market. On Monday, the BSE realty index plummeted by 7.65%, a sharper decline than the benchmark Sensex's 3.35% drop. Shares of both DLF and Unitech mirrored the realty index, falling by 7.5%.
Lehman's Demise Deepens Credit Crisis for Indian Developers
This event further exacerbates the existing credit crunch faced by Indian real estate developers, who are already grappling with declining sales, escalating construction costs, and restricted access to credit. It is anticipated that Lehman Brothers will be forced into a fire sale of its assets.
The financial services giant had demonstrated considerable optimism regarding the Indian market and had emerged as a prominent investor in Indian real estate. Earlier this year, it secured office space in Mumbai with a substantial monthly rental of Rs 1 crore, indicating their commitment to the region. This substantial commitment, however, may now divert funds that could have flowed to the Indian real estate markets from other holdings of Lehman and various global funds.
Global fund houses typically allocate resources by country. As these institutions acquire Lehman's stakes in Indian assets, they are now required to reallocate previously earmarked funds from new projects to these existing investments, creating a liquidity gap for new real estate ventures.
"Lehman’s departure will impact future cash flows of real estate companies. In a market situation like today’s, it will be all the more difficult for the firms to raise funds," commented Ambareesh Baliga, Vice-President of Karvy Stock Broking.
Lehman's Investment Portfolio in India
Lehman Brothers' investment portfolio in India included a $200 million investment in DLF Assets, a DLF promoter group company, last year. A few months ago, it acquired a 50% stake in Unitech's Mumbai project for $175 million. The financial titan had also invested $80 million in the Bangalore-based SEZ Gandhi City, with plans to increase its stake to $300 million. Other investments encompassed a 40% stake in an IT park project by Peninsula Land in Hyderabad, with an initial investment of Rs 50 crore. Furthermore, Lehman Brothers had partnered with Mumbai-based developer HDIL to bid for the redevelopment of Dharavi, Asia's largest slum.
Concerns Over Future Funding and Project Valuations
While developers who have already received funding from Lehman Brothers remain secure, those awaiting further investment are now at risk. Some analysts predict that a distress sale by Lehman Brothers could negatively impact the valuation of existing projects.
DLF CFO Ramesh Sanka had previously assured ET that Lehman's divestment from DLF Assets would not affect its valuation. Similarly, Unitech MD Sanjay Chandra stated that the company, having already received anticipated funds, would remain unaffected by Lehman’s bankruptcy.
FDI norms stipulating a three-year lock-in period could potentially prevent Lehman Brothers from engaging in an immediate sale, but analysts counter that these restrictions may not apply in bankruptcy proceedings, further unsettling an already volatile market.