Piramal Fund Management Pvt. Ltd will invest ₹ 2,320 crore in Lodha Developers Pvt. Ltd’s signature World Towers project in central Mumbai, in what is probably the single largest debt financing deal in Indian real estate.
A part of this money will be used to repay debt and the remaining will be used to complete construction of the project.
Some of the money will be used to offer an exit to HDFC Property Fund, which acquired a 10% equity stake and invested ₹ 500 crore in the project’s World One residential tower in 2010.
The partnership between Lodha and Piramal marks the coming together of the country’s largest developer in terms of sales and one of the most aggressive investors in the real estate sector today.
This is the second transaction between the two, after Piramal invested ₹ 425 crore in Lodha’s Venezia project in central Mumbai in May this year.
“The beauty of this transaction is in the way it has been structured. It is a large deal and we have carefully looked at the developer’s project cash flows and taken security and cash flow cover in many projects," said Khushru Jijina, managing director, Piramal Fund Management. “This transaction demonstrates our ability and willingness to scale our financing relationships with our choice of partners and stands testament to the marketing and execution track record demonstrated by Abhishek Lodha," he added in a reference to the managing director of Lodha Group.
The deal has been structured as a fixed-return debt investment with periodic coupon payments.
Lodha Developers clocked about ₹ 8,000 crore of gross sales in 2015-16, higher than any other developer, but fell short of its own ambitious sales forecast of ₹ 9,000 crore. This year, the developer has set a target to hit the gross sales mark of ₹ 9,000 crore.
The World Towers project in Lower Parel, Mumbai, has the 117-storey World One tower, the World Crest tower which is complete, a third, 80-storey tower under construction (commercial or residential) and an office-cum-retail tower. Both World One and World Crest are residential towers.
“The project is large and is in various stages of development. It is about four years from completion and we will use most of the capital in finishing constructing the project," Lodha said.
“We are seeing momentum building up in our business with sales, delivery and collections all moving up. This transaction will further strengthen our balance sheet and give us room to further improve our growth," Lodha said.
Despite a three-year slowdown in the real estate sector, private equity funds and non-banking financial companies have been aggressively lending to real estate firms, primarily in the form of debt and debt-structured capital.
Customization has become critical while structuring transactions and each transaction is adapted to the needs of the developer.
Investors are also not shying away from advancing money to help developers refinance existing loans.
HDFC Property Fund, backed by Housing Development Finance Corp. Ltd (HDFC), had invested ₹ 500 crore in the World One tower, pegged to be the tallest residential tower in the country. HDFC is expected to exit with about ₹ 1,500 crore—partly paid from Piramal’s investment and partly from internal accruals from sales in World Crest—with an internal rate of return (IRR) of about 22%. This exit transaction will close in about a month’s time.
“We are expected to receive the money in two tranches. ₹ 800 crore will come first and the remaining ₹ 700 crore will come in the second tranche," said a senior HDFC executive, who didn’t wish to be named.
As most developers struggle to build and sell projects because of extensive construction delays, large investors like Piramal are focusing on building partnerships with established developers who have bucked the trend and are focused on delivering homes to customers in time.
While Piramal intends to move towards more equity-based transactions this year, debt financing will continue, said Jijina.
“However we are looking at only selected developers who we want to lend to. In Lodha’s case, their sales momentum even in a challenging scenario gives us a lot of confidence," he added.
Known for its appetite for large transactions and doing multiple investments in a single developer’s projects, Piramal invested ₹ 1,200 crore as project-specific debt in a luxury residential project being developed by Omkar Realtors and Developers Pvt. Ltd in Mumbai’s upmarket Worli neighbourhood in 2015; it has invested in many other projects of Omkar.
Piramal Fund Management has about ₹ 32,000 crore of assets under management, which includes equity investments and commitments made but not yet disbursed.
“Debt financing is here to stay for some time, and the demand for such capital continue to remain high as developers need some form of external financing to either repay existing lenders or finish projects to deliver on schedule," said Shashank Jain, partner, transaction services, at consulting firm PricewaterhouseCoopers India.
Although sales in the premium residential segment have been tepid amid the real-estate downturn, unique projects such as World One are relatively immune to market conditions, said Jain.