It seems that none other than NBFCs are currently willing to place their bets on the domestic housing sector as private equity (PE) firms have consistently reduced their exposure to the sector along with banks. According to the latest available data, PE firms had injected more than $1.1 billion (approximately Rs 7,250 crore) in housing projects back in 2011. In a sharp contrast, this year, PE funds have invested $0.1 billion (Rs 650 crore), a Knight Frank estimate stated. From a share of 50% in the overall PE investments in 2013, housing now comprises just 4% share. Banks too have consistently tightened their purses. A KPMG report said bank funding to the sector has reduced from $4.4 billion (approximately Rs 30,000 crore) to $1.3 billion (Rs 8,710 crore) between 2013 and 2016, a decline of more than 70%. “The long-standing forms of raising capital have all dried up; whether it is pre-sales, operating cash flow, bank funding or the public markets and NBFCs have largely replaced them,” said Dev Santani, head of residential financing, Brookfield Asset Management.
At the moment, there is low-risk appetite among investors and PE investors are avoiding execution, approval and marketing risks at all costs, said Samantak Das, chief economist and research head at Knight Frank India. In the previous year, the housing industry took a hit due to demonetisation and the RERA. Experts, however, maintained that reforms and measures aimed at increasing transparency will ultimately mean more capital.
“All this means a more liquid and institutionalised market into the real estate sector, which is in the process of maturity,” said S Sriniwasan, managing director at Kotak Investment Advisors. But so far, the maturity has not meant money for real estate developers. According to a report published by KPMG, the reform-driven year “has pushed all stakeholders into a wait and watch mode” except NBFCs. “NBFCs have surplus liquidity available with them at the moment and competition within the sector is rife. So each of them are lending aggressively to real estate,” said Sunil Rohokale, CEO and managing director of ASK Investment Management.
Not only are HDFC, LIC, Indiabulls, Piramal Fund Management, Altico and Edelweiss lending consistently to the ailing housing industry, sensing an opportunity, more players such as IndoStar Capital, Everstone, IDFC and True North are looking to make a beeline. At the moment, they command about 18% to 20% interest. Rohokale and most fund managers said the risk associated with making large-ticket investments is getting more aggravated as cases from the sector is now starting to make an appearance in the newly instituted NCLT. Developers, however, opine that one reason why PE investments have dried up is their expectation for return.
“Most of them are currently stuck with expected returns in excess of 22% which is not sustainable and will have to be moderated or transitioned to pure equity,” said Ashish Raheja, managing director at Raheja Universal. As the pressure of NPAs mounted on banks, they gradually stepped back from real estate exposure and now with the NCLT cases, it is unlikely that at least PSU banks will return to the party anytime soon, said experts. With RERA, there is no doubt developers are under pressure to construct and deliver projects and it seems that large NBFC lenders will continue to do much of the heavy lifting in terms of financing for a while.