Brexit: Lodha and Indiabulls with UK assets face risks, says Fitch-The Total Investment & Insurance Solutions

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12  July 2016 

Brexit(The Total Investment & Insurance Solutions)

Indian homebuilders with significant investments in the London property market will face near-term challenges from Britain's vote to leave the EU on June 23, says Fitch Ratings. Indiabulls Real Estate Ltd and Lodha Developers Pvt Ltd have significant exposure to the luxury residential and commercial property segments in London. Both companies made sizeable investments in London's Mayfair and suburbs in 2013 and 2014. The Total Investment & Insurance Solutions

In a report, the ratings agency says, "Demand for luxury residential properties and commercial properties - the segments some Indian homebuilders have invested in - may remain weak at least over the coming six to 12 months as buyers postpone purchases and banks trim loans amid increased economic uncertainty." 

"Of the two, Indiabulls is less exposed to demand volatility in the next six to 12 months because it only expects to start developing its properties in 2017. Lodha could be more exposed to near-term property-market turbulence because it has already launched the smaller of its two investments," the ratings agency says. The Total Investment & Insurance Solutions

According to Fitch, Lodha's rating already factors in the uncertainty around presales in its projects, both at home and overseas, as well as our view that near-term operating cash flows may not be sufficient to reduce its high leverage. Indiabulls' rating factors in its demonstrated ability to reduce leverage over the last 12 months, as well as the modest improvement in sales momentum in its key domestic property projects, it added. The Total Investment & Insurance Solutions

Asking prices of London's luxury residential properties have fallen by 5%-20% over the last few weeks by some market estimates. This is in spite of the British pound trading at all-time lows against the US dollar - foreign investors make up a considerable part of the demand for London's luxury residential properties. The Total Investment & Insurance Solutions 

"However over the longer term, these risks may be moderated by the tight supply of new residential developments, particularly in Central London, owing to challenges in securing regulatory approvals on new projects," Fitch says. The Total Investment & Insurance Solutions

Commercial property demand has also weakened, and in some instances, prompted investors to exit commercial property-focused investment funds. This has led to some funds freezing withdrawals to enable a more orderly closure, while others have offered withdrawals at steep discounts to the net asset value to reflect the potential impact of having to sell assets quickly. Furthermore, many foreign and domestic banks have also cut credit exposure to London property investors by reducing loan-to-value ratios or freezing new loans altogether. The Total Investment & Insurance Solutions

Fitch says, the risk to Indian homebuilders will depend on the extent leverage was used to fund their London projects, and whether project construction and marketing sales coincide with the ongoing market volatility. Homebuilders may choose to defer marketing launches until investor sentiment improves, cut prices to spur higher sales, or sell equity stakes in the projects to reduce leverage, it added.