Bengaluru: Non-banking financial companies (NBFC) are increasing their exposure to real estate and expanding the scope of investments beyond residential projects, giving tough competition to private equity (PE) funds.
Slowing sales volume and unsold inventory pile-up in the residential segment have compelled domestic PE firms to moderate their investment momentum and venture into the office segment as well. Still, NBFCs haven’t slowed down and continue to lend aggressively to real estate.
Altico Capital India Pvt. Ltd, the NBFC of Asia-focused investor Clearwater Capital Partners Llc, expects its loan book size to touch Rs4,000 crore in 2016-17compared to Rs1,600 crore in 2015-16. Altico’s focus is on the residential space and it started construction financing and commercial office project lending last year. It now plans to look at warehousing and logistics.
“We will continue to grow at a rapid pace as opportunities in real estate are plenty. We are looking at last-mile project financing and refinancing in advanced projects, which reduces risks significantly," said chief executive Sanjay Grewal.
Grewal says that risks are getting mitigated as lenders and investors are transacting with larger, established developers and lending to brownfield projects with approvals.
Of the Rs35,000 crore of Piramal Finance Ltd’s assets under management, including equity investments and commitments made but not yet disbursed, more than Rs28,000 crore is from its NBFC, including construction finance. From Rs1,600 crore in early 2014, Piramal Finance has scaled it up to over Rs28,000 crore, building a successful business amid India’s worst real estate slowdown.
According to a March research report by property advisory Knight Frank, NBFCs have gained significant market share over the previous two years and currently contribute about 18% of the total institutional funding requirement of this sector. While NBFCs have gained a larger share, from 12% in 2015 to 18% in 2016, PE funding has dropped from 61% to 58% in the same period.
“NBFCs are the last who are left in the game and are still lending actively and aggressively. As more consolidation happens in the real estate sector and smaller developers find it tough to expand, we will focus more on established developers but will offer more flexibility in terms of repayment," said the head of a large domestic NBFC, who didn’t wish to be named.
Local non-banking finance divisions of global investment firms, like KKR India Asset Finance Pvt. Ltd and Xander Finance, have also stepped up investments despite the lull in the sector.
“NBFCs are getting a lion’s share of the market because cost of capital is lower and many developers want debt over equity. We are deploying money in real estate at a steady pace but cautiously because risk is high. We are not doing luxury housing or city-centric deals," said Amar Merani, chief executive of Xander Finance.
KKR India Asset Finance, which inked its first deal in 2014, has deployed $200 million in the last two years and plans to continue the investment momentum going forward, said a person directly familiar with the company’s plans but didn’t wish to be named.
“NBFCs have become the primary source of capital for residential developers. They lend at lower rates compared to PE funds, have lower return expectations and offer more flexibility. With a lot of capital- chasing developers, there is a lot of competition among capital providers, putting a lot of downward pressure on the cost of capital," said Rajeev Bairathi, executive director and head of capital markets, Knight Frank India. “Also, since RBI allows NBFCs a protective mechanism in case of default, they can use certain securities to de-risk themselves."
The NBFC lending space is fairly crowded now with several institutional investors initiating the process to procure a licence to set up a new NBFC, buying out an existing NBFC or reviving an existing but dormant entity to start lending.
Rising Straits Capital, an asset management firm, has set up a real estate-focused NBFC last year to lend funds to cash-strapped developers. However, chairman and managing director Subhash Bedi says he is cautious.
“We are waiting and watching because it is tough to lend to projects without understanding the implications of the new real estate law. The overall India story again looks interesting to foreign investors and we too want to invest but once there is more certainty in the real estate regulations," Bedi said.