How Alternate Investment Fund can tackle the growing challenge of stressed real estate in India
January 14, 2021 1:16 PM
By bringing in an Alternative Investment Fund (AIF), not only can the stressed asset puzzle be solved, but a viable solution can be chalked out for all the stakeholders.
To make the AIF-backed model successful, it is imperative to give due attention to completion, marketing, and selling of the inventory, alongside raising and managing the fund.
On the face of the jolt faced during the COVID times, Indian real estate continues to bounce back substantiated by healthy aggregate demand, lowered home loan rates, and attractive payment plans by the developer fraternity. As business activities are getting restored and there is a healthy moderation visible in the economy, ascending tendencies in Indian real estate will continue to gain momentum.
Despite the sentiments in real estate improving, the industry is marred by growing piles of stuck or stressed projects. Latest estimates suggest that there are over 450,000 units, which are stressed/stuck at the moment.
The growing challenge of stressed projects has persisted for the past few years in real estate, which aggravated during the NBFC crisis, making it difficult for developers to secure funding. The situation further worsened in COVID times. The government has announced a stimulus fund of Rs 25,000 crore, but it will fall short in the face of such a large crisis.
Not all Distress is Permanent
However, not all distress is permanent. Sometimes, distress itself can act as a catalyst for future transformations.
Probably the same applies to stressed real estate. By bringing in an Alternative Investment Fund (AIF), not only can the stressed asset puzzle be solved, but a viable solution can be chalked out for all the stakeholders.
Many such projects are 60-70% complete & only need recapitalization or kick-start financing to get the work back on track. This can be raised with the help of an AIF and the investments can be deployed into the projects. Once completed, the inventory can be sold off and the overall cash flow of the projects can be drastically improved.
For developers who are already stressed, it might not be very simple to raise the required capital completely on their own. However, an AIF can fill the gaps by securing funding from other institutional and retail investors, thus bringing great relief to the developers and offering them a viable exit.
Investors are also keen to make investments as such assets are generally available at a deeply discounted price when purchased in bulk, thereby ensuring very attractive returns. Our own experience in the past has suggested that developers are willing to give up to 30% discounts in bulk purchases, as all they are looking for is a safe exit.
End-to-End Execution Management is Essential
To make the AIF-backed model successful, it is imperative to give due attention to completion, marketing, and selling of the inventory, alongside raising and managing the fund. For instance, we have launched our AIF recently by partnering with Rising Straits, a well-known real estate PE player. Named as 360 Rising Straits Capital (RSC), our role is not just limited to securing, planning & managing the funding.
We bring much more to the table through our Development Management Arm i.e project construction & monitoring, cash flow management, marketing & sales management, channel partner activation, inventory management, collection of receivables, and CRM support. We have the capability & resources at our disposal to manage the entire end-to-end execution of the project. This brings all the major stakeholders in a synchronized fashion, thereby offering a tremendous amount of execution speed & efficiency.
Plenty of Potential to Take Off
The new arrangement, wherein an AIF acts as the fulcrum & brings the major stakeholders in a synchronized fashion, has plenty of momentum to take off. It can create the roadmap for redeeming the stressed real estate in India.
It can give great relief to so many developers, who are stuck with stressed assets. Likewise, the investors are also happy to enter as they can make the distressed purchase with clear exit visibility- ensuring safe & sound returns. The fund managers can also make plenty of profit in the arrangement. Even in our AIF, despite a hurdle rate of 18% for the investors, we have enough headroom for ample profits. The biggest beneficiaries are the home buyers, who can get possession within a stipulated timeline.
In the times to come, stressed real estate AIF will continue to deepen its foothold in the industry & enable more stressed projects to reach their logical conclusion. Such initiatives are also aligned with government authorities’ constant focus to tackle the stressed assets menace and ensure timely delivery of units to the homeowners.