Home >Industry >Banking >KKR, Singapore GIC to set up real estate-focused NBFC

Mumbai: Kohlberg Kravis Roberts and Co. LP (KKR), one of the world’s largest private equity (PE) firms, is joining hands with Singapore’s sovereign wealth fund to set up a non-banking financial company (NBFC) that will lend funds to property developers in India as other sources of cash dry up.

To begin with, the NBFC, for which the regulatory approvals are currently under way, will have a corpus of $150 million (around 810 crore), said three people close to the development. This will be the first real estate-focused NBFC in India.

“Government of Singapore Investment Corp. (GIC) will be one of the anchor investors in the NBFC, while KKR is putting capital from its balance sheet into it," said one of the two person cited above, who did not want to be identified.

The plan to set up a real estate-focused NBFC comes at a time when banks are shying away from lending to property developers and PE firms are struggling to get returns from the sector owing to the slump in economic growth.

Only a few PE firms have been able to return money to investors after they invested funds during the property boom of 2006-08, when developers had promised 20-25% returns. Since then, more and more investors are focusing their attention on debt instead of equity.

Close to 80% of the transactions in the real estate sector are debt-based and the trend is expected to continue as developers seek more capital. Even PE investors now prefer to either offer pure debt finance or structured deals, combining high-return, high-risk equity with a modest assured return on debt.

“The NBFC will offer structured debt to real estate companies and it is a good way to bring permanent, long-term debt and equity capital into the sector," said the second person cited above, requesting anonymity.

He added that real estate companies are now issuing collateralized non-convertible debentures to high networth individuals, which offer high returns, but also face risks, including failure to pay timely interest and difficulties in liquidation.

Both KKR and GIC did not respond to emails sent to them on Friday.

While many NBFCs offer funds to the real estate sector in India, most of them do not lend more than one-third of their portfolio to the sector.

“If an NBFC is only doing real estate funding, it will not be able to get leverage. What if they run out of cash? Banks wouldn’t finance them if they only have a real estate portfolio," said the chief executive of a new NBFC, who also did not want to be identified. This is why, according to him, most NBFCs do a mix of real estate and non-real estate debt funding in India.

NBFCs that have been involved with offering debt to real estate firms say the demand is huge, and while risks such as delays in project completion and dropping sales exist, defaults are not something that worry them.

“Overall, while there may have been few cases of delays in interest payments, there has not been any major default on principal repayment," said Vimal Bhandari, managing director and chief executive, IndoStar Capital Finance Pvt. Ltd.

In 2011, Ashmore Group Plc, Everstone Capital Management and the PE arm of Goldman Sachs set up IndoStar Capital. IndoStar, which is expecting to close the current fiscal with a 2,000 crore loan book, has an exposure of about 25% to the real estate sector. Bhandari said the real estate industry is seeing many loans being re-profiled, especially by way of tenure extension.

KKR may have been encouraged to start a real estate-focused NBFC by the success of its existing NBFC in India—KKR India Financial Services Pvt. Ltd, set up in 2009. The arm has so far funded about 20 companies, investing nearly $1.5 billion. Its debt deals include funds provided to Analjit Singh’s Max India Ltd, Gautam Thapar’s Avantha Power and Infrastructure Ltd, and the privately held investment company of Sajjan Jindal’s JSW Group.

PE firm KKR has been active in India since 2006, with total investments exceeding $1.1 billion. Its India PE portfolio includes Aricent, Bharti Infratel Ltd, Max India group, Coffee Day Resorts Pvt. Ltd, Dalmia Cement (Bharat) Ltd, JSW Group, Magma Fincorp Ltd and TVS Logistics Services Ltd.

Experts say the line between PE funds and NBFCs is fast disappearing. PE firms, for example, are asking between two and two-and-a-half times collateral, and are only lending to projects that have secured the necessary approvals for construction and are not overpriced. NBFC capital, however, is expensive, at interest rates of 20% and upwards, while banks lend at 13-14% and PE funds charge 22-28% for debt transactions.

In 2010-12, an estimated 5,000-6,000 crore flowed into the sector from NBFCs.

Funding for developers has to come from somewhere when banks are not lending and PEs are unwilling to fill the breach, said a Mumbai-based investment banker, who did not want to be identified.

“The demand for capital is very high in this sector, and to that extent setting up an NBFC makes perfect sense. The challenge is finding the right set of promoters," he said. According to him, this sector is fraught with black money, political connections and delays.

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