At a time when its rivals have tightened their purse strings, Ajay Piramal owned Piramal Fund Management, one part PE fund and one part NBFC, has emerged as real estate’s largest investor. When managing director, Khushru Jijina took over in 2012, PFM’s loan book was just R1,400 crore, now it is more than Rs 20,000 crore an indication of how dominant a lender it is even at a time when the sector is reeling under a financial crisis. In a conversation with Priyanka Ghosh and Shubhra Tandon, Jijina explain why he has not shied away from taking bets and writing big cheques. Excerpts:
You have grown your loan book exponentially at a time your peers have held back investments,on the grounds the market is too risky. Could you take us through your assessment of risk?
The difference in perceived risk is because we understand real estate more than we understand lending and that, I think is the biggest difference. We have invested heavily in building a more than 100 member team, which is considered large, to have our ears-on-the-ground. More than 70% of our time is spent monitoring companies even when they are able to meet interest deadlines because we have to catch early signs of stress. Our in-house processes for monitoring and underwriting are strong to begin with, we cannot wait until the first NPA happens. I can confirm to you we don’t have a single NPA on our books. We believe that having ground knowledge is the underwriting.
Still, there are questions on creditworthiness of some of the largest companies. How are you structuring your lending?
When developers need funding, we not only study the particular project but also the entire company, its projects, cash flow visibility etc. We evaluate each project and cherry pick our collateral. These are the projects we want to take a call on and back. Our mantra is to have full control on the projects that are being put up as collateral, we can even replace existing lenders.
Typically, NBFCs lend on the basis of hard security, for us cash flow visibility is important. The value of a ready flat is far greater than that of under construction assets. Should there be a delay in projections, we tailor payment deadlines so that developers are not running around trying to refinance our loan. In fact, lenders often don’t enforce step-in rights whereas in the past, we have taken over projects in Bengaluru and Hyderabad.
What do you consider as your core competency vis-a-vis other lending institutions?
We adapt products to suit the need of the hour better because as we put ourselves in the shoes of the developer and assess requirements. In that sense, we are more developers than lenders.
Two years back, owing to a slowdown in government permissions, we spotted opportunities in last mile, construction finance. At the end of March last year, construction finance in the form of structured debt comprised less than 4% of our lending and now it is more than 42%. Another major opportunity we spotted was the need for bulk buying (of apartments). Traditionally, it was HNIs who mainly did bulk buying but they also did not allow developers to raise prices of apartments so there is a conflict, a competition of sorts. In comparison, we hold on to bulk purchases for a long time and after the stipulated period, either the developer sells them or we will. So we innovate. Additionally, we can process funding at a faster pace and at competitive rates. Earlier we were lending 2-3% higher than our peers but now the difference is barely 0.5%. At the land buying stage, return expectations are north of 22%; when developers get permissions, it is between 16% and 18% and construction finance between 12% and 14%.
So, going forward where are the pockets of opportunity?
There is a serious requirement for equity so we are looking to augment our investments, so far our total equity exposure is Rs 6,000 crore and we will be making more this year. Construction finance for commercial projects is another area that is showing signs of potential investment. In terms of markets, we are present in Mumbai, Chennai, Bengaluru, Pune and NCR. More than 40% of our exposure is in the MMR, 25% is in Bengaluru. Historically, Bengaluru is a stable, end user driven market with corporate governance of the highest order so we are very comfortable. I expect Chennai to recover in the next six months whereas NCR might take more time.
In your opinion, what do developers need to do for meaningful recovery to kick in, especially in the luxury segment, which is the mainstay of Tier I developers?
Execute. Prices have stabilized. The biggest problem is sales velocity and the best thing for developers to do is to complete projects. The pain in the luxury segment will continue, it cannot be wished away so companies will have to build, there is no other choice.
There are often rumblings that some companies are going to go bust. Is that a valid fear. What is your sense on the sector as a whole because Tier I represents a minuscule percentage of the sector?
Both lenders and customers have selected the developers whose projects they want to invest in, which is 20% of the sector. Two years back, sales were driven primarily by discounts but now people want to know their money is secure so they will pay a premium for companies they trust. Often we are approached for funding and we then direct them to some of our partners for JDAs. In that sense, we are market-makers. Obviously, each and every project will not find a development partner so some developers will not survive this downturn but it’s hard to quantify.