Equipped for the future

Written by Mona Mehta | Updated: Jun 14 2009, 06:46am hrs
Raising funds by the debt-burdened real estate majors has been a concern for some time now. The major players have identified qualified institutional placements (QIPs) as a new alternative to raise funds. QIP is basically a primary market fund requirement, which fuels either the growth or completes restructuring capital in the company. But if the funds are raised to get their hold on realty projects going, then what will happen to their future projects and vice-versa

According to Shobhit Agarwal, Joint MD, capital markets, Jones Lang LaSalle Meghraj (JLLM), They will have to use these funds equally to retire debt, invest in under-construction projects and pump money into projects that are ready for launch rather than in futuristic locations. After all, they have to cater to what sells on the current market.

Monetary concerns

Currently, debt-ridden realty companies are raising required amount for completing their hold on realty projects in three ways. One is by sale of assets (such as DLFs sale of land in Mumbai, and Unitechs divestment of their corporate offices and hotel holding in Gurgaon). A second way is by accessing public markets (again DLF and Unitech are examples), and finally by accessing private equity, which companies are in the process of doing so.

Certain investors who have invested in projects that are getting delayed comment on what they think of developers taking the help of QIP to invest in new projects. On the promise of anonymity, an investor opines that delays are not caused only due to lack of funding, but may also be because of a lack of demand. Delays and QIPs do not necessarily have any correlation. By easing the liquidity situation, everyone from homebuyers to developers will be benefited.

Recently, the shareholders of Indiabulls Real Estate (IBREL) have approved raising up to Rs 3,000 crore ($600 million) through shares sale to qualified institutional buyers (QIP), to fund its projects and acquire new businesses. Last week, the founders of DLF, Indias largest listed developer, raised $783 million through a share sale in the firm. In April, Unitech raised $325 million through a placement of shares with institutional investors. Meanwhile, Orbit Corporation is all set to launch four new real estate projects and is mulling plans to raise Rs 250 crore through QIPs. According to industry sources, certain real estate players have started using around $1 billion from foreign investors and additional deals worth $2 billion are awaited to get infused through QIPs. Not only that, the board of directors of Parswanath Developers and HDIL recently are all set to raise $530 million and $600 million respectively for their capital requirement.

Agarwal adds, It does make sense for them to do so. Finally, real estate companies have to invest in their future receivables meaning that they have to put money into their products. Players have to be prudent with the placement of the funds they raise through QIPs, and the best approach is to do so in a blended fashion. This means that they will have to use these funds equally to retire debt, invest in under-construction projects and pump money into projects that are ready for launch rather than in futuristic locations. After all, they have to cater to what sells on the current market.

Future uncertain

Amidst the scenario, builders who are raising money either through QIPs or through the private equity (PE) route seems to shy away from the fact that the funds being raised would be utilised for commencing their hold on projects. Rohtas Goel, managing director, Omaxe says, We are in the process of raising funds through QIPs. For the purpose, we are yet to decide upon the valuation required to be raised.

Lalit Kumar Jain, Chairman of Pune-based Kumar Builders and President of Promoters & Builders Association of Pune (PBAP) says, For the past two quarters, our cash flow was affected while we were continuing with our real estate projects in Pune. However, we have managed to go ahead with the projects with the funds that we had. At least 70% of apartments of a 30-storey Nirvana residential project, which we launched on May 22, 2009, has been booked till date. In Pune, real estate prices exceeds from Rs 1,800 per ft2 onwards.

Meanwhile, Kumar Builders is now all set to raise Rs 600 crore through the private equity route, which will be financed in launching six township projects. Jain says, We are entering into joint development agreements with local landlords in Bangalore and Hyderabad and divesting 26% equity in special purpose vehicle (SPVs), which is being launched in this quarter for developing township projects in these cities. Meanwhile, Kumar Builders will be developing four township projects in Pune on its own, which is in the process of being launched.

Bangalore-based Puravankara Projects is raising $170 mn through QIPs said Ravi Ramu, its director (finance). The funds would be utilised for ongoing as well as future projects, he added.

Looking at the scenario, it seems that till the time the real estate sector shows signs of revival with full vigour, most big real estate companies would have raised enough funds through QIPs. This is because; currently top real estate majors are all queuing up to raise funds through PEs and QIPs. Also, Indias realty players are facing a cash crunch as the cost of funding rose last year amidst the global credit squeeze, while inflated valuations kept home buyers on the sidelines.

New projects have since been put on the backburner while many of those under construction are delayed.

According to Thomson Reuters, a steady stream of companies have used the QIP route, under which securities are placed with institutions much like private placements, to raise thousands of crores of rupees in recent weeks. And the flood is only set to increase in the coming weeks. About 30 more QIPs with an estimated value of Rs 40,000 crore could hit the Indian market this year.

The money raised via QIPs so far this year has crossed the volumes achieved for the whole of last year. In terms of volumes, this segment has seen over 17% growth compared with proceeds raised during January to May 2008.

While QIPs have emerged as a window of opportunity for many cash-strapped companies, some analysts feel the amount that could be raised during 2009 may be more in the range of Rs 14,000 to Rs 25,000 crore.