Since project financing is the lifeline of residential projects and new real estate regulations come with stiff penalties, it is imperative that the investment strategy is recalibrated, say investors. Photo: Pradeep Gaur/Mint
Since project financing is the lifeline of residential projects and new real estate regulations come with stiff penalties, it is imperative that the investment strategy is recalibrated, say investors. Photo: Pradeep Gaur/Mint

PEs, NBFCs move to take more control of real estate projects

Private equity firms and NBFCs are taking more control in real estate projects, tightening underwriting norms and taking stock of the overall financial health of the developer in transactions

Bengaluru: As defaults rise and balance sheets of real estate firms weaken, private equity (PE) firms and non-banking financial companies (NBFC) are taking more control in projects, tightening underwriting norms and taking stock of the overall financial health of the developer in transactions.

Since project financing is the lifeline of residential projects and new real estate regulations come with stiff penalties, it is imperative that the investment strategy is recalibrated, investors said.

“While investing these days, realty funds, particularly equity investors, pay significant attention, in their due diligence process, to the developer’s overall ability to raise money in the proposed investment and see that their investment may not get undesired reputation risk due to developer’s defaults in some other projects," said Anuranjan Mohnot, managing director at investment firm Amplus Capital Advisors Pvt. Ltd, part of the Lalbhai Group whose flagship company is Arvind Ltd.

“Developers’ financial condition and defaults are major issues while investing today. RERA ( Real Estate Regulation and Development Act, 2016,) has by and large stopped flow of funds from one project to another project of the same developer and hence it may happen that some projects of a developer may be doing fine but others are starving for liquidity. Such cases may have a serious impact on the developer’s credit score and may impact his further fund-raising ability," Mohnot said. 

To be sure, investors haven’t tightened their purse strings but they are more cautious, inking deals with only those who they trust or do multiple transactions with the same developer partner. 

“We place a great deal of emphasis and importance on the strength of the developer’s balance sheet rather than just restricting our analysis to the project in question. This enables us to both cross collateralise our funding as well as ensure stringent financial health parameters for our choice of counterparts," said Khushru Jijina, head of Piramal Finance Ltd. 

Jijina added that more than ever before, in the post-RERA world, underwriting parameters have to incorporate the various provisions that have been implemented as part of the Act.

Piramal’s Jijina added that its investment team has recalibrated its underwriting norms and the teams have changed its documentation of escrow accounts and monitoring process to adapt to RERA parameters.

The sector has witnessed a four-year-long slowdown and there is no apparent revival in sight, putting investors, both domestic and offshore, on a cautious path. 

Amar Merani, managing director and chief executive of Xander Finance Pvt. Ltd, an NBFC, said one digs deeper these days into quality of sales and collections, cost analysis to complete projects and sufficiency of approvals to develop unhindered along with “the skin in the game for the developer."

In recent months, many investors have been lending against a bunch of projects of a single developer in one deal, which is a new trend, and that adjusts the risk quotient and assures returns, compared to investing in a single project. 

“Investing in a bouquet of projects helps both the lender and developer. The builder’s debt can be consolidated under a single lender, giving more power to the latter because he gains more control. It also gives more flexibility to the developer in terms of repayments," said an executive at a global investment firm, requesting anonymity. 

“With defaults rising in real estate, investors have become realistic and are evaluating (deals) more seriously. They are taking control of more projects to avoid default in a single project, transacting with known rather than unknown developers," said Shobhit Agarwal, managing director (capital markets and international director) JLL India.

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