Cost Of Borrowing Falls For Real Estate Developers – Livemint – 16-Dec-2014

December 25, 2014 - Uncategorized

Property developers are increasingly able to borrow at cheaper rates as finance companies and private equity funds compete to extend capital to real estate projects, betting that a rebound in property sales will end a prolonged slump. The rush of money and the competition among investors to close deals have softened rates, benefiting developers who have been borrowing at steep rates from non-banking financial companies (NBFCs) and private equity (PE) as banks turned cautious in financing them in the last few years. Developers with good credentials and a reputation for timely interest payments can get capital at discounted rates, said Ravi Ahuja, executive director at property advisory Cushman and Wakefield India. “From 20-21%, the rates have come down to 17-18% as more money chases a few reputed developers,” Ahuja said. “As a result, even smaller developers today have relatively easier access to capital.” As banks became reluctant to lend to developers over the past three years, NBFCs and PE funds have offered lifelines in the form of debt financing or so-called structured finance deals with a debt-equity mix. Many PE funds that were unable to return money to investors after pure equity investments during the 2005-07 boom, opted for these debt-structured deals. Equity transactions may make a comeback if the Reserve Bank of India cuts interest rates next year, as is widely expected by economists. Lower borrowing rates may also stoke demand for homes, reviving the fortunes of real estate companies. Investors and analysts say that the real estate sector is gradually moving towards equity transactions again, in a higher return-higher risk model. “In the last 6-12 months, there has been a larger inflow of private capital chasing developers from different sources such as family offices, foreign capital, pension funds etc.,” said Vimal Bhandari, managing director and chief executive of Indostar Capital Finance Pvt. Ltd. Since more money has come into the system, there has been a reduction in yield that may lead to investors choosing to do either or both of secured equity and senior secured lending, Bhandari said. Typically, banks lend to developers at 13-15%, PE funds at 22-24% and NBFCs at 18-22%. While in the case of bank lending, the end use of money has to be specified, it is mostly not required in NBFC lending. The latter, however, adopt various risk-mitigating measures by insisting on quarterly interest payments, fixed returns and high collateral. “Deals at 20% and above are almost a thing of the past. There is fierce competition amongst investors, and it’s interesting to see multiple investors chasing a good developer or a project,” said a fund manager, who didn’t wish to be named. Among recently concluded deals, Bangalore-based Total Environment Building Systems Pvt. Ltd raised Rs.255 crore by selling non-convertible debentures to Indostar Capital Finance Pvt. Ltd at an interest rate of 17%. Total also raised Rs.200 crore from Peninsula Brookfield Investment Managers Pvt. Ltd at around 19%. “Since debt returns have reduced owing to excess and easily available capital, we may see a return of equity transactions by mid-2015,” said S. Sriniwasan, chief executive of Kotak Realty Fund. Equity transactions were more common during 2005 and 2006. The transactions promised higher returns but also took on more risk. Investors today prefer the debt structure that gives them returns that are in line with equity deals, but offer much more security and control over the project cash flows. Apart from the existing pool of capital, 2014 saw a number of new alliances being inked between large global sovereign and pension funds and domestic companies to pump in more capital into real estate. In February, Piramal Enterprises and Canada Pension Plan Investment Board, in a strategic alliance, set up a $500 million real estate finance company in India to do debt financing. Sovereign wealth fund Government of Singapore Investment Corp. Pte Ltd entered into a Rs.1,500 crore joint venture agreement with Brigade Enterprises Ltd to invest in projects in South India in September. And in May, Xander Group Inc. and a consortium of investors led by Dutch pension fund APG Asset Management NV announced a $300 million venture to buy income-generating commercial office assets across main office markets. During January-November this year, PE funds invested around $1 billion in real estate, compared with $756.74 million in 2013, according to VCCEdge, which tracks such investments. While debt returns are marginally low, it doesn’t imply that equity deals will come back with a bang, said Balaji Raghavan, president of real estate practice at India Infoline Ltd. “There are different kinds of equity and we may see the kind that will be available to good developers or to large affordable housing projects,” said Raghavan. Property analysts say equity transactions have already started making a comeback of sorts. Ramesh Jogani, chief executive and managing director of Indian Property Advisors Pvt. Ltd, said he will be doing pure equity deals in the bulk-buying space, where the fund will buy apartments at a discount. Indian Property has partnered with Centrum Wealth Management to invest around Rs.250 crore. Realty firm Ozone Group’s chief executive Srinivasan Gopalan said the market is looking at equity deals and there are reasons for it. “In debt deals, one quarter of bad sales and the developer has to struggle to make the quarterly interest payment, which isn’t the case with equity. When a developer raises equity, there is cash flow in the system and no impending payments, giving him the liberty to execute projects on time,” Gopalan said. Ozone Group is also planning to raise equity prudently, he added.


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