Bangalore: Non-banking financial companies, or NBFCs, are gaining leverage as lenders of choice for small real estate firms scouting for funds to repay costly loans or even complete projects.
Indostar Capital Finance Ltd has lent Rs 50 crore to Mumbai-based developer Mighty Group for it to partly repay an earlier Rs 50 crore loan taken from Edelweiss Capital, another NBFC.
Edelweiss, on its part, has syndicated loans of Rs 170 crore for two realty firms in Mumbai.
Mighty Group “will use Rs 40 crore to repay Edelweiss and the remaining money will be used for a new project we are planning”, said managing director Rajesh Madhani.
This is Indostar’s third real estate transaction after it was set up earlier this year by London-based Ashmore Group Plc., Everstone Capital Management and the private equity (PE) arm of Goldman Sachs Group Inc. with a capital base of Rs 900 crore.
Before this, it gave a Rs 100 crore loan to Sumer Group and a little less than Rs 50 crore to Sunshine Infrastructure Pvt. Ltd for land acquisitions and payments, and project completion.
Indostar Capital declined to comment on the Mighty Group deal.
With banks turning cautious on lending to the realty sector, NBFCs and private equity (PE) funds have increasingly come to the rescue of both large and small property firms to meet their capital requirements.
In a report earlier this year, brokerage Enam Securities Pvt. Ltd said 20 real estate developers raised about Rs 3,000 crore from NBFCs through non-convertible debentures (NCDs) in 2010-11. These are debt instruments that cannot be converted to stock and offer healthy yields of 14-18%.
The demand for NBFC loans will only rise this year, said Amit Goenka, national director, capital transactions, Knight Frank India, a property advisory.
“While PE deals take more time to close, it is quicker and far easier to borrow from NBFCs,” he said. “NBFCs also don’t have a three-year long lock-in period like a PE fund and are cheaper.”
While banks lend to real estate firms at interest rates of 13-14%, NBFCs charge 20-21% and PE firms seek returns of 28-30%, said Goenka.
Edelweiss Capital, besides its regular lending activity, syndicates loans involving external investors.
It recently syndicated a Rs 70 crore loan for Shree Group to construct and complete its signature 41-storey residential and commercial project in Mumbai’s Tardeo area. In another deal, it syndicated a Rs 100 crore loan for Jaycee Homes largely to fund construction.
Vijay Kamdar, promoter of Shree Group, said the Tardeo project is in the last leg of construction and the money was required for completing the project. “If required, we may raise money for our future projects again,” he said.
An Edelweiss spokesperson said the mandates were for syndication and less than 10% of the loan amount was taken on their books.
Demand for NBFC money exists across the realty sector, irrespective of the size of the developer, said Sanjeev Rastogi, senior vice-president, Edelweiss Capital.
“In an interesting trend, we are seeing a lot of HNIs (high networth individuals) pooling in and lending to real estate firms, just the way NBFCs do,” he said.
Mumbai-based Neptune Developers Pvt. Ltd is looking to raise Rs 100 crore from NBFCs for a 100-acre township it is developing in Pune, a company spokesperson said.
Bangalore’s Century Real Estate Holdings Pvt. Ltd is seeking a similar sum from NBFCs, after having raised Rs 200 crore from Kotak Mahindra Bank Ltd’s NBFC last year.
Deals India, published jointly by Mint, Dow Jones Newswires and The Wall Street Journal, is a one-stop destination for investment professionals following deal flow, deals news, private equity and venture capital activity in India.