While banks may be a trifle reluctant to lend to real estate companies, non-banking financial companies (NBFCs) and private equity (PE) firms are willing to lend and even offer a two-year moratorium, three fund managers confirmed to FE.
Developers are finding it hard to service their debt as both sales and unit launches have plummeted. “Sales are now being driven by end users and people will no longer buy apartments that are just a hole in the wall,” said Amit Pachisia, chief credit officer at Altico Capital. Demand, which is sitting on the fence at the moment, might surge when there is some evidence of near completion so execution is essential, Pachisia added.
Echoing him, Khushru Jijina, managing director of Piramal Fund Management, one of the largest real estate lending platforms at the moment, said that there is no better way to tackle the issue of flagging sales than to complete projects.
Rampant execution means the need for urgent working capital intensifies in the sector.
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Provisions of the Real Estate (Regulation and Development) Act, 2016, now do not allow companies to sell apartments at the launch stage, scuttling the age-old practice of monetising a parcel of land at the pre-sales stage itself. So developers have no choice but to borrow. This is evident in the manner in which structured debt finance has exploded in the sector in contrast to bank credit declining. At last count, an estimated 80% of $3.1 billion has made its way to residential projects last year in this form, according to a Cushman & Wakefield estimate. As per Reserve Bank of India data, bank credit to real estate grew by just 1% in the past one year (until January 2017).
The moratorium is being given so that developers can use the funds to build without immediately worrying about velocity of sales.
Banks, of course, will not make such adjustments. The assumption is that once customers see pace and progress in construction, sales will follow. “The value of a ready flat is far greater than that of under construction assets,” said Jijina. The idea is to match the repayment schedule to the time line of cash flow from the project.
It’s a win-win situation should market fundamentals improve and people be willing to purchase mature assets, which, as Jijina mentioned, is more expensive. But if the last three years are any indication, projections can hardly be cast in stone, opening up the sector to the possibility of a massive debt trap and refinancing requirement.
Debt of the 10 listed real estate companies stood at a high of R46,268 crore for the quarter ended September 2016, up from R44,159 crore, according to Bloomberg data.
But according to experts, the concerns surrounding capital availability will be allayed because of the provisions of RERA. “Transactions will become far more refined when RERA kicks in so factors like completion timeline, mismanagement of funds, etc, that worry funds will be taken care of,” said Neeraj Sharma, director at Grant Thornton.
Fund managers said despite the initial lenience, underwriting norms are getting far tighter. “Collateral often includes not just the project for which the loan is being extended but also some of the other fast-moving, best-performing assets of the company,” said Pachisia. Besides, lenders are leaving no stone unturned to map the cash flow of the companies they are lending to. As Jijina pointed out, the monitoring has to be strong enough to pick up even the slightest warning signs of a default. Often, NBFCs and PE funds are buying out other financiers from projects because as lone lenders, they can exercise higher control.
There is no lowering of the return expectation either. albeit the life cycle of projects is changing. The timeline of investments is changing, now the cycle is five or six years, which is how long it realistically takes to execute a project, Pachisia said.
Developers are in a difficult position. Typically, structured debt finance is about 8% more expensive than bank debt. But those who can access structured debt will do so despite the higher cost because at the moment most might default for the lack of cash flow. Banks will not tailor or adjust to the extent a fund will, Sharma added.