Beyond residential projects: The rise of real estate NBFCs
Non-banking financial companies (NBFC) are increasing their exposure to real estate and expanding the scope of investments beyond residential projects, giving tough competition to private equity (PE) funds.
Slowing sales volume and unsold inventory pile-up in the residential segment have compelled domestic PE firms to moderate their investment momentum and venture into the office segment. Still, NBFCs haven’t slowed down and continue to lend aggressively to real estate.
Altico Capital India Pvt Ltd, the NBFC of Asia-focused investor Clearwater Capital Partners LLC expects its loan book size to touch ₹4,000 crore in 2016-17, compared to ₹1,600 crore in 2015-16. Altico’s focus is on the residential space and it started construction financing and commercial office project lending last year. It now plans to look at warehousing and logistics.
“We are looking at last-mile project financing and refinancing in advanced projects, which reduces risks,” said Sanjay Grewal, CEO, Altico Capital India
Risks are getting mitigated as lenders and investors are transacting with established developers and lending to brownfield projects with approvals, he added.
Of the ₹35,000 crore of Piramal Finance Ltd’s assets under management, including equity investments and commitments made but not yet disbursed, more than ₹28,000 crore is from its NBFC, including construction finance. From ₹1,600 crore in early 2014, PFM (expand) has scaled it up to over ₹28,000 crore.
According to a March research report by property advisory Knight Frank, NBFCs have gained significant market share over the previous two years and currently contribute 18% of the total institutional funding requirement of this sector. While NBFCs have gained a larger share from 12% in 2015 to 18% in 2016, PE funding fell from 61% to 58% in the same period.
“As more consolidation happens in the real estate sector and smaller developers find it tough to expand, we will focus more on established developers but will offer more flexibility in terms of repayment,” said the head of a large domestic NBFC, who didn’t wish to be named.
Local non-banking finance divisions of global investment firms such as KKR India Asset Finance Pvt Ltd and Xander Finance have also stepped up investments. “NBFCs are getting a lion’s share of the market because cost of capital is lower. We are deploying money at a steady pace but cautiously because risk is high,” said Amar Merani, CEO, Xander Finance.
KKR India Asset Finance, which inked its first deal in 2014, has deployed $200 million in the last two years and plans to continue the investment momentum, said a person directly familiar with the company’s plans but didn’t wish to be named.