New Sources of Realty Fi­nanc­ing

“that, which does not kill us, makes us stronger”- these words of ger­man philoso­pher friedrich Nietzsche can cer­tainly be im­plied on the long term ef­fects of the Rera and gst. ankit go­hel gets in­dus­try opin­ions on the fund­ing op­tions avail­able for real-es

Realty Plus - - Table Of Content -

The pro­vi­sions and penal­ties im­posed by RERA have left the small and medium sized real es­tate de­vel­op­ers un­der pres­sure to se­cure fund­ing to com­plete the projects. They are now turn­ing to their lenders for help. The lenders or the fi­nan­cial in­sti­tu­tions on their part are too will­ing to help and adopt a more hands-on ap­proach. Some of the in­sti­tu­tions are hand-hold­ing small and medium de­vel­op­ers to com­plete un­fin­ished projects and even go the ex­tra mile to sell un­sold in­ven­tory on their be­half. In or­der to over­see project com­ple­tion, many lenders are hir­ing project man­agers and re­cruit­ing tech­ni­cal staff. They are in­creas­ing the work­ing cap­i­tal on un­der-con­struc­tion projects and on be­half of de­vel­op­ers they are also un­der­writ­ing and dis­tribut­ing un­sold stock.there­fore, this as­sis­tance from the fi­nan­cial in­sti­tu­tions with strong bal­ance sheets is help­ing the de­vel­op­ers in com­plet­ing de­layed projects and earn­ing back their lost rep­u­ta­tion due to the de­lay. Cur­rently, the com­mer­cial realestate space in In­dia has at­tracted sig­nif­i­cant at­ten­tion from global in­vestors. The im­pend­ing launch of Real Es­tate In­vest­ment Trusts (REITS) in In­dia saw some large global pri­vate eq­uity, sov­er­eign, pen­sion funds in­vest­ing in com­mer­cial of­fice space and malls es­pe­cially in Tier II and Tier III cities. Post de­moni­ti­sa­tion mar­ket was ex­pect­ing price cor­rec­tions in the band width of 30-40 %, but these pre­dic­tions turned into re­al­ity this year with the ad­vent of RERA and GST. Due to all the un­cer­tain­ties,

there was an ex­pec­ta­tion of fall in prices which re­sulted into home­buy­ers de­fer­ring their de­ci­sion to pur­chase homes. There­fore, this cre­ated dif­fi­culty for de­vel­op­ers as their pri­mary source of fund­ing has been pre-sales ad­vances from the home­buy­ers. Terming RERA a game changer for the in­dus­try and talk­ing about the dif­fi­cul­ties faced by the de­vel­op­ers, Pu­nit agar­wal, ceo, Nir­vana Realty said, “Now there are ad­di­tional com­pli­ances to com­plete, the banks are not re­leas­ing any funds with­out a RERA reg­is­tra­tion to safe­guard their in­ter­est, this has stopped fund­ing of projects at the ini­tial stage when de­vel­op­ers need funds the most to buy the land and get re­quired per­mis­sion.”

On a brighter note, ajay Jain, Joint Man­ag­ing Di­rec­tor, sun cap­i­tal ad­vi­sory ser­vices Pvt ltd men­tioned, “In­flow of for­eign funds in last 12 to 24 months had been good due to the reg­u­la­tory re­forms such as RERA, GST and Be­nami have brought in trans­parency and cor­po­rate gov­er­nance in the real es­tate sec­tor. Fur­ther­more, PMAY and var­i­ous tax sops by Gov­ern­ment along with af­ford­able hous­ing projects has rea­son­ably im­proved sales and re­turn on projects.”


Fund-rais­ing for the real es­tate de­vel­op­ers has never been an easy busi­ness. And, in the post RERA era, it has be­come tougher. The builders re­quire con­struc­tion fi­nance, in­ven­tory fi­nance, takeover fi­nance and much more dur­ing var­i­ous stages of devel­op­ment of a project. Thus, at an early stage, the builders are in need of eq­uity cap­i­tal which is said to be pa­tient money. Debt Fi­nanc­ing -The de­vel­op­ers are choos­ing off­shore fund rais­ing op­tions and debt or eq­uity fi­nanc­ing. Un­der Debt fi­nanc­ing, the de­vel­oper bor­rows money in ex­change of fu­ture pay­ments. The cred­i­tor, con­sid­ered as se­cured, will get reg­u­lar in­ter­est pay­ments which will be based on pre-de­fined rates. But, he will pos­sess no own­er­ship rights to the de­vel­oper’s projects. Pri­vate Eq­uity - The de­vel­oper can also opt for pri­vate eq­uity or pub­lic eq­uity if he de­cides to go through Eq­uity-based fi­nanc­ing. In pub­lic eq­uity, he can opt for a list­ing on the local stock mar­ket, or a list­ing on a for­eign mar­ket whereas in pri­vate eq­uity through real es­tate ven­ture cap­i­tal or pri­vate eq­uity fund. Banks have in­vested in many projects with a buy­back guar­an­tee or a clause al­low­ing them to con­vert debt to eq­uity and take over the project par­tially. “De­vel­op­ers ini­tially used to raise funds from pri­vate in­vestors with se­cured and un­se­cured terms, how­ever now there has been a lot of debt fund­ing from pri­vate banks and NBFC. Also a lot of PE funds who are na­tion­als and in­ter­na­tional funds are tak­ing stake in real-es­tate projects now,” said agar­wal. NBFC - Go­ing through pub­lic mar­ket is often a big-bud­get job. Loans from banks also come at high rate of in­ter­est. Thus, Non-bank­ing Fi­nan­cial Com­pa­nies (NBFC) and gen­er­at­ing funds from High Net In­di­vid­u­als (HNI) in the form of Non-con­vert­ible Deben­tures (NCD) are other op­tions which a de­vel­oper can look for. Ac­cord­ing to Jain, a de­vel­oper can bor­row from Banks and NBFC for con­struc­tion fi­nance. For Takeover Fi­nance, Top-up fi­nance and In­ven­tory fund­ing, NBFC and funds from HNI clients in the form of NCD can do the task. The real es­tate play­ers are also closely look­ing at the bi-monthly pol­icy re­views of the Re­serve Bank of In­dia. The rate cuts will lead to the soft­en­ing of in­ter­est rates by the com­mer­cial banks on the loans. This can have a siz­able amount of in­flow of funds in the mar­ket, also rais­ing the de­mand. The higher rate of in­ter­est can af­fect the de­vel­op­ers neg­a­tively on both- sup­ply as well as de­mand- side of the mar­ket. Ac­cord­ing to data by News Corp, in­vestors put in around $1,096 mil­lion in eq­uity and $501 mil­lion in debt fi­nanc­ing in real es­tate projects, to­talling $1,597 mil­lion in the Jan­uary-june pe­riod. The res­i­den­tial projects con­sti­tute of more than 70% of the real es­tate sec­tor in In­dia. It has mostly at­tracted debt fi­nanc­ing in re­cent years. While, the ma­jor chunk of eq­uity in­vest­ments in In­dia have mainly been for buy­outs of com­mer­cial of­fice as­sets.


The in­vestors will bet only for the de­vel­op­ers with good track record, de­liv­ery ca­pa­bil­ity and pos­sess­ing a favourable mar­ket sen­ti­ment. The in­vestors will in­vest the money after un­der­stand­ing the busi­ness plans and know­ing the man­age­ment team. The lender also takes into con­sid­er­a­tion the strength of the builder in re­pay­ment of loans and his timely in­ter­est pay­ment record. There­fore, the cred­i­bil­ity of the de­vel­oper plays an im­por­tant role in gen­er­at­ing funds.

A re­cent JLL re­search shows that the pe­riod be­tween 2015 and Q3 2017 saw an as­ton­ish­ing 54% of in­vest­ments in re­tail real-es­tate hap­pen in Tier II- III cities such as Pune, Bengaluru, Am­rit­sar, Indore, Ahmed­abad and Chandi­garh.

su­nil Ro­hokale, MD & ceo, ask group com­mented, “In the last 5-7 years, most de­vel­op­ers who utilised their land banks by ob­tain­ing ap­provals and launch­ing projects are fac­ing a cash crunch as sales ve­loc­ity is not as high as ex­pected. Most of these projects are lever­aged at high cost and due to slow sales there is a mis­match in cash flows. Their prob­lems are fur­ther ag­gra­vated as they have to be RERA com­pli­ant and fo­cus on project com­ple­tion. Since the sales ve­loc­ity is slow, to fast track con­struc­tion, there is a huge need for flex­i­ble and pa­tient cap­i­tal.” While, mak­ing an in­vest­ment, Jain puts for­ward cer­tain pa­ram­e­ters for fi­nanc­ing a de­vel­oper. The el­i­gi­bil­ity cri­te­ria de­mands that a de­vel­oper must have de­liv­ered at least 5 lakhs sq.ft. in last ten years and his ac­count is reg­u­lar with all lenders and not an NPA. An­other sig­nif­i­cant con­sid­er­a­tion is the lo­ca­tion of the project. He also states that the de­vel­oper should not have any crim­i­nal or un­sat­is­fac­tory le­gal record. On the other hand, Ro­hokale be­lieves in part­ner­ing with de­vel­op­ers. His con­sid­er­a­tions in­clude a good track record of timely project de­liv­ery, de­vel­oper’s prod­uct of­fer­ing and cus­tomer centricity. “a strong re­gional brand with a fo­cus on af­ford­able and mid in­come seg­ment who has availed fund­ing from banks and pri­vate eq­uity play­ers and ser­viced loans/pro­vided ex­its are pre­ferred. The project needs to be in job cor­ri­dors of top 5 cities and the ticket size of up to Rs. 50 lakhs for a 2BHK unit is a good propo­si­tion to at­tract de­mand. The project on an in­de­pen­dent ba­sis needs to have the ca­pa­bil­ity to gen­er­ate suf­fi­cient cash flows to at­tract pri­vate eq­uity fund­ing.”

the Reit hype

When ques­tioned about the REITS in In­dia, Jain pointed out cer­tain pre-req­ui­sites for any real-es­tate as­sets to be listed on REITS, “Good siz­able com­mer­cial prop­erty which are rent yield­ing, su­pe­rior qual­ity of con­struc­tion, qual­ity of lessee (in term of brand and fi­nan­cial to pay con­tin­u­ously rent for long ten­ure say 10 to 15 years), track record of de­vel­oper do­ing sim­i­lar many projects is past and ca­pac­ity to pay in­ter­est and loan re­pay­ment even if space is not fully leased out or rental is not suf­fi­cient to ad­dress both are some of them.” Talk­ing about the re­turns earned by in­vest­ing in REITS, Ro­hokale said, “Two types of in­come can be earned from REITS. One is the reg­u­lar div­i­dend in­come and the other is through cap­i­tal gains on trans­fer of REIT units on ex­changes. REITS are struc­tured to gen­er­ate reg­u­lar in­come as 90% of rentals are to be dis­trib­uted to in­vestors. The av­er­age yield gen­er­ated by REITS can range 8-9% and are meant for risk-averse in­vestors who want in­come with­out tak­ing too much risk. Thus, the re­turns are low and are akin to that gen­er­ated by fixed in­come/debt in­stru­ments but they pro­vide a new av­enue to small in­vestors to par­tic­i­pate in com­mer­cial real es­tate and earn sta­ble in­come.” agar­wal feels that there will be a lot of con­sol­i­da­tion and REITS may change the way com­mer­cial real es­tate func­tions at the mo­ment. “The Rental ROI in res­i­den­tial mar­ket is very low which doesn’t make REIT’S in­ter­ested in them, so it should not af­fect hous­ing seg­ment at the mo­ment.” In the last 5 years, with res­i­den­tial real-es­tate wit­ness­ing a slump, com­mer­cial real-es­tate space in In­dia has at­tracted sig­nif­i­cant at­ten­tion from global in­vestors. The rekin­dled in­ter­est of for­eign funds in res­i­den­tial real es­tate after a gap of 10 years is quite ev­i­dent as we saw many for­eign funds vis­it­ing In­dia this year. An im­por­tant thing to be noted here is that the lenders are now tak­ing more proac­tive role in a real-es­tate devel­op­ment project. It is be­cause all the in­for­ma­tion re­gard­ing the project and its stake­hold­ers is now pub­licly avail­able due to RERA. Ad­di­tion­ally, banks & funds have an ad­di­tional se­cu­rity of RERA to make sure the de­vel­oper de­liv­ers the project on time with the right qual­ity. In com­ing years, such con­fi­dence among the lenders will grad­u­ally ease the fund­ing to realestate projects.

pu­nit Agar­wal


Source -JLL GRI Real Es­tate Roadmap In­vest­ment Out­look

Su­nil ro­hokale

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