Piramal Fund Management Pvt. Ltd, one of the largest lenders and investors in residential real estate, plans to finance completed commercial projects, including office and retail assets, through a flexible lease rental discounting (LRD) model, as part of its strategy to diversify into commercial realty.
Piramal has identified an initial pipeline of transactions worth Rs1,500 crore in top property markets and plans to scale it up to a book size of Rs10,000 crore by March 2018.
Typically, bank lending in office projects happens through a two-stage process. One, construction financing at an early stage, where there are construction-related risks. Two, lease rental discounting model of financing, a slightly longer-term funding, where the project becomes rent generating and developers repay from those lease rentals.
Piramal’s Flexi LRD, as the company calls it, is targeting higher liquidity transactions than what traditional banks are able to offer, along with added flexibility for the developers in terms of repayment. Owners of completed assets will, therefore, be able to approach the firm to raise significantly more flexible financing than they would otherwise be able to source from a bank.
“...By introducing this innovative form of Flexi LRD, we are targeting owners and holders of marque assets and offering them a form of finance that is both competitive and flexible whilst also enabling them to raise more money against the same asset when compared with traditional forms of LRD,” said Khushru Jijina, managing director, Piramal Fund Management.
This is an opportunistic initiative and a diversification strategy for Piramal, which plans to expand its existing portfolio and tap into rent generating office projects, which have performed way better than residential developments over the past few years.
Earlier this year, the firm started giving out construction finance to office projects and has already disbursed around Rs5,000 crore.
Jijina said the focus would be to finance or partner developers who have existing relationships with them.
“This is long-term debt, with a 9-12-year investment horizon and we will offer a lot of scope to developers by which they can avail of construction finance, LRD and even start with construction finance and later convert it to LRD as the project matures,” Jijina said.
Developers, who raise money against mature, rent-yielding assets, usually deploy it for expansion or for their new projects.
The real estate sector in India has witnessed tough times in the past three years, particularly the residential segment, where sales have been slow. Property prices have stagnated, leading to a liquidity crunch for many developers. However, even in this situation, commercial office space has emerged as a bright spot with steady momentum in leasing, investors buying office space at high valuations and good demand in large cities.
“In a scenario of uncertainty, rent-yielding stabilised assets is the best bet for an investor. There is high demand for good quality office space and supply is limited. Due to the capital intensive nature of commercial real estate projects, we have seen consolidation in this space, with a few, large developers who have taken the lead and are building bulk of the projects,” said Rajeev Bairathi, executive director, capital markets, at property advisory Knight Frank India.
With its new flexible LRD scheme, Piramal will now be able to map the entire range of commercial office projects, right from the under-construction stage where they need construction finance till the asset is mature. While banks lend at 9.5-10% to office projects, Jijina said Piramal will lend at around 10-11% but it will offer more liquidity and better repayment terms.
“The important part is the EMI (equated monthly instalment) won’t go up because the loan is larger, it can be paid at the end by either refinancing it or we can do another LRD with the developer,” he said.
This year has seen a new pipeline of office projects coming up, even as global investors such as Blackstone Group Lp already own a large portfolio of office assets in India. Shopping malls are also gaining ground, with a large number of investors, including Blackstone, looking to buy retail assets.
“Investors today will not risk financing commercial office projects today unless they are done by large, established developers because of the risk in construction and then, in leasing out,” said Raj Menda, corporate chairman, RMZ Corp, a Bengaluru-based realty firm.
Menda said raising finance through LRD in mature projects helps developers in maximising growth plans in a mature manner.