1. How demonetisation transformed property sector: 3 stunning real estate opportunities now available

How demonetisation transformed property sector: 3 stunning real estate opportunities now available

Demonetisation has reduced speculation around real estate assets for the time being and moving ahead given RERA regulation, this impact is here to stay.

Updated: October 20, 2017 2:04 PM
demonetisation, real estate, demonetisation impact on real estate, RERA, Sale Leaseback Transactions, affordable housing Demonetisation has reduced the speculative nature of house buying to some extent.

By Taponeel Mukherjee

For investment professionals, demonetisation has thrown open the doors in terms of real estate opportunities. Demonetisation has reduced speculation around real estate assets for the time being and moving ahead given RERA regulation, this impact is here to stay. Real estate assets – not being speculative in nature and reflecting real fundamentals – are not only beneficial to the economy overall, but also create three opportunities for investors:

1) Lending Opportunity to Small to Medium-Sized Developers: While large-scale projects and developers have seen significant interest from private equity and real money investors, small to medium-sized developers have seen their traditional sources of funding dry up with demonetisation. The fact that most of these developers were struggling with high debt levels prior to demonetisation has only exacerbated the problem.

Additionally, RERA has ended the traditional practice of using home buyer’s advance payments to fund projects to a large extent. Demonetisation has reduced the access to cash. These changes are positive in the long run and have created a need to provide funding to the medium and small-sized developers. The investment opportunity specifically is in bridge loans to complete projects that are stuck at 50-80% of completion. The obvious question is that given the influx of funds into real estate in the last 3 years, why do these opportunities exist? The reasons are:

a. The relatively smaller size of the projects creates deal sizes not worth the time for some of the larger funds. Mind you, the due diligence required is the same as the larger ticket size deals.

b. Asymmetric information is another issue. However, working with local advisors to put together a portfolio of such assets to create dispersion around location of project, type of project and term structures of loans should create value.

c. Most of the focus in the last few years has been on high quality office space. However, a lot of residential projects are stuck as well. The ability to acquire these residential projects at a discount or to use structured finance transaction to get equity kickers can create significant value.

2) Sale and Leaseback Transactions: While a lot of lenders have seen a rise in NPAs in their loan books as high debt levels take a toll, foreign investors so far have been relatively reluctant to invest in distressed Indian opportunities. Demonetisation has started the process of making the real estate sector far more professional and institutionalized. Lenders should use the real estate sector with a revitalized image to shore up their balance sheets. There is tremendous demand for attractive brownfield real estate from yield hungry foreign investors.

Perhaps lenders such as banks can start monetising their real estate assets through a sale and lease back agreement with foreign investors and take advantage of the new image of a far “cleaner” real estate sector. A large bank owns significant property in prime areas of, say, Delhi, Mumbai, Kolkata and Bengaluru. The bank can work with an investor such as a pension fund or an insurance company to sell their office assets to the investor and lease it back for operations. This solves a twofold problem. The bank gets capital infusion that it so sorely requires and the investor gets access to attractive assets with a better credit borrower rather than investing in the distressed loans. The economy overall benefits tremendously since the capital infusion adds value. Demonetisation has created this opportunity with an enhanced image for the real estate sector.

3) Affordable Housing: Demonetisation has reduced the speculative nature of house buying to some extent. Hence demonetisation has made houses more affordable. This implies this is the right time to push ahead with the affordable housing scheme in full throttle. While the interest rate subsidies by the government are a step in the right direction, we feel additional regulations are required. Essentially demonetisation has provided us with a real estate sector that is ripe for new regulations such as:

a. Affordable Housing PPP – The Road project PPP model in India is a good template to learn from. The government should standardize documentation and take care of land acquisition. The government should acquire land that is relevant for affordable housing directly. This also assists distressed developers to monetize assets from their land banks.

2. Affordable Housing Authority – The government should create a central authority modelled on the lines of NHAI to take care of land acquisition, title deed issues, environmental clearances and viability analysis

3. Bidding Auction – The private sector should bid for projects all the way from grants on one end of the spectrum to revenue premium at the other, depending on the financial feasibility of the projects

Demonetisation has lent credibility to real estate. This is an opportunity to leverage the new-found credibility to provide a fillip to a core and much troubled sector of the economy to create not just economic value through the efficient use of capital, but also tremendous social capital as a nation.

(The author is CEO, Development Tracks)

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  1. h
    Oct 22, 2017 at 7:52 am
    Also a fundamental change in the tax laws will have its impact to attract more of end users rather than investors. Sepcigically the restriction of tax loss on let out properties of upto 2lacs from previous unlimited loss, this change alone makes leasing out porperties completely unviable as this makes the leverage on let out properties expensive by sigbificantly reducing the subsidisation based on the tax benefit available previuosly as the subsidisation was required given the low rental yields on resi properties
    1. Chandrasekaran Venkataraman
      Oct 21, 2017 at 5:42 pm
      With so many employees being removed from service in IT Sector, even retail housing loan will see steep increase in bad loans. Secondly, with the developers having not reduced the prices much, buyers of affordable houses are waiting on the sidelines. Thirdly, with most of the projects in the outskirts of cities, even if possession is given by the developers, rentals will be low, and hence there is no appe e for investment. Lastly, with the tax regime increasingly discouraging owning more than one house, effects are more adverse.
      1. Pb Pradeep
        Oct 20, 2017 at 4:00 pm
        Author seems to have no idea on the ground realities of real estate and rather wants to praise demonitization. 1) Agree with the first point that RERA has stopped the advance used for other projects, but how does it a result of demonitization? FYI both RERA DEMO were planned separately during congress regime. Also small medium developers are gone. only handful who were not over leveraged are surviving 2) , lease back transactions were always available, Bankruptcy code, AQR in banks forced banks to disclose their stressed assets, thereby taking actions on the same. I really dont understand how DEMO made the sector more professional? 3) DEMO has done nothing just postpone purchases by 3-5 months. Most of the delay in purchases is due to ambiguity in GST. Govt holds approx 1.56 lakh crore of claimed credit refunds for GST. So much fund stuck and their multiplier effect is not there in markets is the reason for last Q slowdown which will revive upon releasing refunds.

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