Investors come up with alternative funding plans for crisis-hit realtors

With developers hit by weak sales, investors offer innovative options to replace plain equity and debt lending

Private equity funds and non-banking financial companies are offering various modes of lending and repayment to real estate developers struggling with weak sales for the third consecutive year.

Innovative forms of investments are replacing plain equity and debt lending, with investors lining up special situation funds, uniquely-themed funds and construction finance.

ASK Property Investment Advisors, which made high risk-high return equity investments in the last seven years, is preparing to raise a special situation fund this year, which will invest equity-type (but not pure equity) money in residential projects for completion of development, or to replace existing high-cost debt and stay invested for 3-5 years.

Along with Rs.1,500 crore of pure equity dry powder, ASK believes there is need for a separate pool of capital for projects at an advanced stage.

“Real estate is passing through a difficult time, with project delays and repayment pressures. The need of the hour is to have different kinds of capital and funds are tweaking their offerings to fill in those funding gaps for developers,” said Sunil Rohokale, chief executive and managing director of ASK Group.

From the pure equity funds of 2005-06, structured debt and mezzanine debt instruments took over in the last few years, with PE funds and NBFCs demanding higher collateral and fixed repayments on a quarterly basis.

However, this put pressure on developers to service debt, as cash flows continued to remain tepid—it was not sustainable. Following this, PE funds and NBFCs started tweaking lending norms, offering more refinancing and repayment flexibility.

With a lot of liquidity chasing a few good projects, this also led to intense competition. PE funds moved towards debt-like structures.

According to Rajeev Bairathi, executive director and head of capital markets at Knight Frank India, NBFCs have evolved too. “From lending based on existing cash flows of a project, NBFCs are now offering acquisition financing to buy land parcels, construction finance as well funding for commercial office projects, different from simple lending to residential projects,” Bairathi said.

Altico Capital India Pvt. Ltd, an NBFC from Asia-focused investor Clearwater Capital Partners LLC, plans to offer construction finance and lend to commercial office projects.

Banks offer construction finance at 11-12%, while NBFCs charge a bit more, but the latter offer more flexible capital and an extended repayment periods.

“NBFCs are now well-capitalized and can compete with banks, by giving construction finance. We are also looking to offer construction finance but with established developers and also lend to office projects because there is a lot of potential in the office sector. We will do early-stage financing in residential and office projects to buy land and in pre-leasing stage respectively, and lend to projects in an advanced stage by facilitating transactions, in which we collect the last payments from customers,” said Altico Capital’s chief executive Sanjay Grewal.

Piramal Fund Management Pvt. Ltd, which introduced innovative financial products such as an apartment buying fund, Mumbai Redevelopment Fund and began construction financing early on, plans to focus on equity investments once again.

This year, it will execute a new strategy for equity investments in land opportunities for investors, to generate superior returns by investing in plotted land development. The firm is in the last leg of signing a $300 million offshore platform with a large Canadian pension fund and will also raise a second redevelopment fund. It also started deploying Rs.5,000 crore to fund commercial office projects this year, and introduced a Rs.15,000 crore line of credit to some of the top developers.

“When we started lending at 18-20% a few years back, it was opportunistic but not sustainable. We realized that developers need to be given time to repay, till the market revives. It is also important to have multiple pools of capital to service different kinds of financing needs but equity remains the need of the hour in the current scenario,” said Khushru Jijina, managing director, Piramal Fund Management, which has Rs.32,000 crore of assets under management, including equity investments and commitments made but not yet disbursed.

Customization is key while structuring transactions and each transaction is adapted to the needs of developers.

“Both equity and debt are offered through different customized products, but we think we will see more equity products coming in. With RERA (Real Estate Regulation & Development Bill) being implemented, investors will have more confidence in developers because there will be delivery timelines for projects, repayments,” said Chintan Patel, partner, deal advisory, real estate and hospitality, KPMG India.

Century Real Estate Holdings Pvt. Ltd, which raised Rs.720 crore from Piramal and Altico last year and an additional Rs.520 crore from Piramal in 2016, got an opportunity to refinance high-cost debt, use some of it as construction finance and to make land payments as well.

“These transactions offered much more flexibility in the usage of capital, which banks don’t offer even if it is cheaper. Because there are different kinds of capital involved, the blended cost of funding automatically comes down,” said Century managing director Ravindra Pai.

“They are under a little pressure in terms of margins, but if they want more margins, they have to take more risks,” he said.

Not only different capital structures, but repayment structures are also customized based on the risk-return perspective.

Repayment issues have cropped up, but funds and NBFCs have either refinanced their own loans to projects or given developers more time to service debt.

Balaji Raghavan, chief investment officer, real estate, IIFL AMC Ltd, said repayment structures are also being customized for each transactions, and instead of fixed repayment schedules, they are being matched with cash flows anticipated from a project.

“We are optimistic about investments in real estate over the next 24 months and are looking at substantial growth in India across investment platforms we have built and capitalized over the last 11 years,” said Rohan Sikri, senior partner, Xander Group Inc.

In the last two years or so, Xander has invested about $250 million mostly in residential assets through the preferred equity route. Separately, Xander Finance, which does senior secured debt transactions, has executed almost 50 transactions adding up to Rs.1,800 crore.

The question is, if the health of the sector doesn’t improve anytime soon, how long will the cycle of financing and refinancing help developers sail through this crisis?

S. Sriniwasan, chief executive of Kotak Realty Fund, is cautious and “hasn’t deployed any money in the last 18 months or so and is in wait-and-watch mode”.

Kotak Realty Fund raised $250 million from offshore institutional investors this year, to make equity investments in residential projects, at a time fund managers wary of equity risks extend only debt finance.