2.45 lakh non-government and non-financial companies have long term debt of USD 341 billion as per RBI data for FY 2018-19
Real estate land and building assets valued at USD 141 billion in FY 2018-19 can reduce outstanding long-term debt
Sale and lease-back of assets can provide long term steady rental yields for funds with patient long-term capital
Monetizing real estate assets can help corporate India retire long term debt of USD 341 billion according to JLL Research. However, banks have an overhang of non-performing loans for the last few years. RBI data on India’s economic financial position in FY 2018-19 reveals that the value of land stood at USD 52 billion and building stood at USD 89 billion. This total of USD 141 billion is 41% of the outstanding long-term debt of USD 341 billion. One of the probable reasons for this situation is lower profits generated from the assets invested in.
An uncertain economic scenario has forced corporate finance heads to reimagine real estate assets as sources of funds to reduce debt. The aggregate financials of approximately 2.45 lakh non-government, non-financial companies indicate that debt accounts for less than 50% of their net worth.
The current pandemic has further worsened asset utilization and profitability. Though real estate assets are required for setting up business operations, they do not contribute directly to the products and services delivered. If these assets are monetized, it can help reduce substantial debt. Land values are recorded at historical prices in the balance sheet, while their market value could be substantially higher. Similarly, the sale value of the buildings would be higher than stated in the books of accounts. Funds generated through the sale of these assets could be high enough to cover the entire debt. The sale and leaseback of these assets will result in no impact on business operations.
Source: RBI database of Indian Economy latest data and JLL research
Speaking on the development, Dr. Samantak Das, Chief Economist and Head of Research & REIS India, JLL said, “With the fall in economic activity, COVID-19 has impacted asset utilization and profitability tremendously. In the current unprecedented circumstances, sale and lease-back of assets is likely to provide long term steady rental yields for funds with patient long term capital as monetization of these assets could reduce substantial debt, and funds generated through the sale of these assets could be high enough to cover the entire debt.”
One of the biggest challenges is the mindset of corporates, who feel that owning real estate is of utmost importance. In many cases, since land is allocated under various state industrial policies, the option of sale and leaseback is not considered. However, in today’s uncertain economic environment, corporate finance heads are likely to look at options using real estate as a source of liquidity. Investors may face challenges on account of ownership titles and valuation. Such deals could take longer time to close due to documentation and taxation issues.
The current pandemic has challenged our take on value, consistency, certainty and quality, which apply for investment decisions too. Investors will gain new lessons and thrive with the latest opportunities in the Indian real estate.