The global financial turbulence and economic slowdown has impelled investors to move away from real estate sector. Even the Mutual Funds' fixed maturity plans (FMPs) are avoiding investment in the cash-strapped realty firms.
With rising interest rates and the overall slowdown in the economy, many Indian companies' creditworthiness has taken a hit. This has made investors doubtful about credit repayment by these firms. They are turning risk averse in this scenario of global turmoil which is worsening situations for the developers. A slowdown in demand, price correction and increasing inventory are factors causing pain to real estate developers.
Fitch recently claimed the short-term outlook for India's real estate sector to be negative. He said, "Growing liquidity concerns may lead to a possible negative impact on the credit profiles of real estate companies." In fact all this has also graded down the short-term debt rating of Sobha Developers and Parsvnath from F1 to F2 and from A to A - respectively.
Ramanathan K, the head of Fixed Income at ING Mutual Fund, said, "Now, one can get good rates in normal bank CDs (certificates of deposit). Earlier, when rates were low, people were willing to take higher credit risk."
Mutual fund houses, which offer FMPs, invest the proceeds in corporate debt, securitized paper, certificates of deposit and commercial paper. But recently these fund houses have taken cautious move and parked their funds in banks. Even the foreign bank papers are considered to be risky in today's situation.
FMPs are debt schemes, where the corpus is invested in fixed-income securities. The tenure can be of different maturities, from one month to three years. They are closed-ended in nature, which means that once the NFO (new fund offer) closes, the scheme cannot accept any further investment. FMP portfolio is generally invested in debt instruments and money market instruments like commercial papers issued by companies and certificates of deposits issued by banks that have a similar maturity period.
Investors have been reluctant to put their money in schemes that invest in foreign bank papers. Though Citigroup and DSP Merrill Lynch's debt papers were downgraded a few months ago, there is no such risk currently with Indian operations, say experts.
A distribution agency head said, "In terms of credit, people are opting for superior-quality papers. They have become more conscious about ratings. Basically, they are looking for credit-worthiness and do not want to take risks for only slightly more returns. Investors are backing out of schemes with such exposure."
In fact large corporate investors are shifting their investments from FMPs to even safer instruments like fixed deposits (FDs). They are worried about the credit quality of some assets in the FMPs.