ASSESSING CORPORATE FAILURE RISK OF REAL ESTATE COMPANIES IN INDIA
Dr.Priyanka Zala1, Dr.Rajalakshmi Vel 2 , Dr.P.C.Lakshmi Narayanan 3
1Assistant Professor, Faculty of Business Administration
GLS University, Ahmedabad
2 Assistant Professor, Faculty of Management Sciences,
Sri Ramachandra Institute of Higher Education and Research, Chennai
3 Dean – Academics, Loyola Institute of Business Administration, Chennai
The Indian real estate sector has been badly battered by the pandemic. A fall in demand for commercial spaces due to work from scenario, disruptions in the supply chain of raw materials and relocation of labour force to home towns during lock down are some of major impacts on the business of real estate companies. Reports of halt in growth of the real estate sector are making are making news as housing sales dips in major cities of the country. In this scenario, the already cash trapped real estate companies are facing the heat. The real business cannot be ruled out from the risk of insolvency that haunts most companies.
The current study chooses a sample of 25 large and mid-size companies of the real estate sector and examines them for insolvency risk applying the time-tested Altman’s model for predicting bankruptcy. The sector is the second largest employment provider and is indirectly connected to the prospects of many allied industries. Based on Z Score values, the study classifies the sample companies as safe, grey zone and bankrupt. The data for computing Z Score is obtained from the financial reports of the sample companies. Suitability of model and authenticity of results are statistically tested using regression and ANOVA. The results of the study states that 52% of the sample companies tested for insolvency fall in bankruptcy zone causing concern for real estate community. A mere 12% of the sample companies fall in safe zone. 36% of sample companies exhibit weakness and show signs of tilting towards insolvency. The Z Score model yields an adjusted R square value of 0.997 leading to the acceptance of the alternate hypothesis that Z Score model is significant in predicting Corporate Bankruptcy.
The study contributes to the existing literature on bankruptcy. It also emphasizes the urgency for policy decisions for the sector in terms of reviving the Real Estate Investment Trust (REITs) to boost the sector for economic development.
Keywords: Real Estate, Insolvency, Bankruptcy, Altman Z Score, Insolvency Bankruptcy Code